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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002
Commission File Number 000 - 32983


CBRE HOLDING, INC.
(Exact name of Registrant as specified in its charter)


Delaware

 

94-3391143
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)

355 South Grand Avenue, Suite 3100
Los Angeles, California

 

90071-1552
(Address of principal executive offices)   (Zip Code)

(213) 613-3226
(Registrant's telephone number, including area code)


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

Title of Each Class
  Name of Each Exchange on Which Registered
     
N.A.   N.A.

Securities registered pursuant to Section 12(g) of the Act:
N.A.


        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 ý        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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. ý

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

        As of June 28, 2002, the aggregate market value of Class A and Class B common stock held by non-affiliates of the Registrant was $0.

        As of February 28, 2003, the number of shares of Class A and Class B commons stock outstanding was 1,724,949 and 12,624,813, respectively.





PART I

Item 1. Business

Company Overview

        Organization.    CBRE Holding, Inc., a Delaware corporation, was incorporated on February 20, 2001 as Blum CB Holding Corporation. On March 26, 2001, Blum CB Holding Corporation changed its name to CBRE Holding, Inc. (the Company). The Company and its former wholly owned subsidiary, Blum CB Corporation (Blum CB), a Delaware corporation, were created to acquire all of the outstanding shares of CB Richard Ellis Services, Inc. (CBRE), an international real estate services firm. Prior to July 20, 2001, the Company was a wholly owned subsidiary of Blum Strategic Partners, LP (Blum Strategic), formerly known as RCBA Strategic Partners, LP, which is an affiliate of Richard C. Blum, a director of the Company and CBRE.

        On July 20, 2001, the Company acquired CBRE (the 2001 Merger) pursuant to an Amended and Restated Agreement and Plan of Merger, dated May 31, 2001, among the Company, CBRE and Blum CB. Blum CB was merged with and into CBRE, with CBRE being the surviving corporation. The operations of the Company after the 2001 Merger are substantially the same as the operations of CBRE prior to the 2001 Merger. In addition, the Company has no substantive operations other than its investment in CBRE. Information regarding the 2001 Merger is included in the "Liquidity and Capital Resources" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" and within Note 3 of the Notes to Consolidated Financial Statements, which are incorporated herein by reference.

        Nature of Operations.    CBRE Holding, Inc. is a holding company that conducts its operations primarily through direct and indirect operating subsidiaries. In the United States (US), the Company operates through CB Richard Ellis, Inc. and L.J. Melody, in the United Kingdom (UK) through CB Hillier Parker and in Canada through CB Richard Ellis Limited. CB Richard Ellis Investors, LLC (CBRE Investors) and its foreign affiliates conduct business in the US, Europe and Asia. The Company operates in 47 countries through various subsidiaries and pursuant to cooperation agreements. Approximately 73% of the Company's revenue is generated from the US and 27% is generated from the rest of the world. See Note 21 of the Notes to Consolidated Financial Statements for financial data relating to the Company's domestic and foreign operations, which are incorporated herein by reference.

Recent Developments

        On February 17, 2003, the Company, CBRE, Apple Acquisition Corp. (the Merger Sub) and Insignia Financial Group, Inc. (Insignia) entered into an Agreement and Plan of Merger (the Insignia Acquisition Agreement). Pursuant to the terms and subject to the conditions of the Insignia Acquisition Agreement, the Merger Sub will merge with and into Insignia, the separate existence of the Merger Sub will cease and Insignia will continue its existence as a wholly owned subsidiary of CBRE (the Insignia Acquisition).

        When the Insignia Acquisition becomes effective, each outstanding share of common stock of Insignia (other than the cancelled shares, dissenting shares and shares held by wholly owned subsidiaries of Insignia) will be converted into the right to receive $11.00 in cash, without interest, from the Merger Sub, subject to adjustments as provided in the Insignia Acquisition Agreement. At the same time, each outstanding share of common stock of the Merger Sub will be converted into one share of common stock of the surviving entity in the Insignia Acquisition.

        As of February 17, 2003, the the transaction was valued at approximately $415.0 million, including the repayment of net debt and the redemption of preferred stock. In addition to Insignia shareholder approval, the transaction, which is expected to close in June 2003, is subject to the receipt of financing and regulatory approvals. The sale by Insignia on March 14, 2003 of its residential real estate services

1



subsidiaries, Insignia Douglas Elliman LLC and Insignia Residential Group, Inc., to Montauk Battery Realty, LLC and Insignia's receipt of the cash proceeds from such sale will not affect the consideration to be paid in the Insignia Acquisition.

Business Segments

        In the third quarter of 2001, subsequent to the 2001 Merger transaction, the Company reorganized its business segments as part of its efforts to reduce costs and streamline its operations. The Company reports its operations through three geographically organized segments: (1) Americas, (2) Europe, Middle East and Africa (EMEA) and (3) Asia Pacific. The Americas consists of operations located in the US, Canada, Mexico, and Central and South America. EMEA mainly consists of operations in Europe, while Asia Pacific includes operations in Asia, Australia and New Zealand. Previously, the Company operated and reported its segments based on the applicable type of revenue transaction.

        Information regarding revenue and operating income or loss attributable to each of the Company's business segments is included in "Segment Operations" within the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and within Note 21 of the Notes to Consolidated Financial Statements, which are incorporated herein by reference. Information concerning the identifiable assets of each of the Company's business segments is set forth in Note 21 of the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

Americas

        The Americas is the largest business segment in terms of revenue, earnings and cash flow. It includes the following major lines of businesses:

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3


EMEA

        The EMEA division has 44 offices located in 27 countries, with its largest operations located in the UK, France, Spain, the Netherlands and Germany. Operations within the various countries typically provide, at a minimum, the following services: Brokerage, Investment Properties, Corporate Services, Valuation/Appraisal Services, Asset Services and Facilities Management, with approximately 83.7 million square feet under management. Certain countries also provide Financial and Investment Management services. These services are provided to a wide range of clients and cover office, retail, leisure, industrial, logistics, biotechnology, telecommunications and residential property assets.

        The Company, operating as CB Hillier Parker in the UK, is one of the leading real estate services companies in that country. It provides a range of commercial property real estate services to investment, commercial and corporate clients located in London. The Company also has four regional offices in Birmingham, Manchester, Edinburgh and Glasgow. In France, the Company is a key market leader in Paris and provides a complete range of services to the commercial property sector, as well as some services to the residential property market. In Spain, the Company provides extensive coverage operating through its offices in Madrid, Barcelona, Valencia, Malaga, Marbella and Palma de Mallorca. The Company's Netherlands business is based in Amsterdam, while its German operations are located in Frankfurt, Munich, Berlin and Hamburg. The Company's operations in these countries generally provide a full range of services to the commercial property sector, along with some residential property services. As of December 31, 2002, there were over 1,300 professional and support staff employed, of which approximately 700 were in the UK.

Asia Pacific

        The Asia Pacific division has 26 offices located in 11 countries. The Company believes it is one of only a few companies that can provide a full range of real estate services to large corporations throughout the region, including: Brokerage, Investment Management (in Japan only), Corporate Services, Valuation/Appraisal Services, Asset Services and Facilities Management, with approximately 140.0 million square feet under management. The CB Richard Ellis brand name is recognized throughout this region as one of the leading worldwide commercial real estate services firms. This division employs over 2,000 individuals. In Asia, the Company's principal operations are located in China (including Hong Kong), Singapore, South Korea and Japan. The Pacific region includes Australia and New Zealand with principal offices located in Auckland, Brisbane, Melbourne, Perth and Sydney.

Competitive Strengths

        The market for the Company's commercial real estate business is both highly fragmented and competitive. Thousands of local commercial real estate brokerage firms and hundreds of regional commercial real estate brokerage firms have offices throughout the world. Most of the Company's competitors in the Brokerage and Asset Services lines of business are local or regional firms that are

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substantially smaller than the Company on an overall basis, but in some cases may be larger locally. In addition, there are several national, and in some cases international, real estate brokerage firms with whom the Company competes. The Company believes it has a variety of competitive advantages that have helped to establish its strong, global leadership position within the commercial real estate industry. These advantages include the following:

        Global Brand Name and Presence.    The Company is of the largest commercial real estate services providers in the world in terms of revenue and, together with its predecessors, has been in existence for 97 years. The Company operates over 200 offices in 47 countries around the world. The Company believes that it is among the leading commercial real estate services firms in several major US markets including New York, Los Angeles, Chicago, Houston, Dallas/Fort Worth and Phoenix as well as in many other important real estate markets around the world including Hong Kong, London and Paris. The Company's extensive global reach combined with its localized knowledge enables it to provide world-class service to its numerous multi-regional and multi-national clients. Furthermore, as a result of its global brand recognition and geographic reach, the Company believes that large corporations, institutional owners and users of real estate recognize it as the pre-eminent provider of high quality, professional, multi-functional real estate services.

        Market Leader and Full Service Provider.    The Company provides a full range of real estate services to meet the needs of its clients. These services include commercial real estate Brokerage Services, Investment Properties, Corporate Services, Mortgage Banking, Investment Management, Valuation and Appraisal Services, Real Estate Market Research, Asset Services and Facilities Management. The Company believes that its combination of significant local market presence, strong client relationships and its scalable, diversified line of business platforms differentiates it from its competitors and provides it with a competitive advantage.

        Strong Relationships with Established Customers.    The Company has long-standing relationships with a number of major real estate investors, and its broad national and international presence has enabled it to develop extensive relationships with many leading corporations.

        Recurring Revenue Stream.    The Company believes it is well positioned to generate recurring revenue through the turnover of leases and properties for which it has previously acted as transaction manager. The Company's years of strong local market presence have allowed it to develop significant repeat client relationships, which are responsible for a large part of its business.

        Attractive Business Model.    The Company's business model features a diversified revenue base, a variable cost structure and low capital requirements.

        Empowered Resources.    The Company's proprietary data network gives its professionals instant access to local and global market knowledge to meet its clients' needs. It also enables the Company's

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professionals to build cross-functional teams to work collaboratively on projects. With real-time access to state-of-the-art information systems, its professionals are empowered to support clients in achieving their business goals.

        Strong Senior Management with a Significant Equity Stake.    The Company's senior management team consists of a number of highly respected executives, most of whom have over 20 years of broad experience in the real estate industry. The Company's senior management team beneficially owns approximately 5% of the Company's outstanding common stock.

        L.J. Melody competes in the US with a large number of mortgage banking firms and institutional lenders as well as regional and national investment banking firms and insurance companies in providing its mortgage banking services. Appraisal and valuation services are provided by other international, national, regional and local appraisal firms and some international, national and regional accounting firms. CBRE Investors has numerous competitors including other real estate investment managers and investment banks.

        The Company's Asset Services and Facilities Management lines of business compete for the right to manage properties controlled by third parties. The competitor may be the owner of the property who is trying to decide upon the efficiency of outsourcing or another management services company. Increasing competition in recent years has resulted in increased pressure to provide additional services at lower rates. The Company has mitigated that pressure by reducing the cost of delivery through automation and by providing services that generate premium fees. One way the Company seeks to grow the Asset Services and Facilities Management lines of business is through assignments that provide synergies with the Company's other lines of business.

Risk Factors

The success of the Company's business is significantly related to general economic conditions and, accordingly, its business could be harmed in the event of an economic slowdown or recession.

        During 2002, the Company continued to be adversely affected by the slowdown in the global economy, which negatively impacted the commercial real estate market. This caused a decline in leasing activities within the US, which was partially offset by improved overall revenues in Europe and Asia.

        Moreover, in part because of the terrorist attacks on September 11, 2001 and the subsequent outbreak of hostilities as well as the conflict with Iraq and the risk of conflict with North Korea, the economic climate in the US and abroad remains uncertain, which may have a further adverse effect on commercial real estate market conditions and, in turn, the Company's operating results.

        Periods of economic slowdown or recession in the US and in other countries, rising interest rates, a declining demand for real estate, or the public perception that any of these events may occur, can harm many segments of the Company's business. These economic conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and brokerage commissions derived from property sales and leases. In addition, these conditions could lead to a decline in sales prices as well as a decline in demand for funds invested in commercial real estate and related assets. An economic downturn or a significant increase in interest rates also may reduce the amount of loan originations and related servicing by the commercial mortgage banking business. If the brokerage and mortgage banking businesses are negatively impacted, it is likely that the other lines of business would also suffer due to the relationship among the various business lines. Further, as a result of the Company's debt level and the terms of the debt instruments entered into in connection with the 2001 Merger and related transactions, the Company's exposure to adverse general economic conditions is heightened.

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If the properties that the Company manages fail to perform, its financial condition and results of operations could be harmed.

        The revenue the Company generates from its Asset Services and Facilities Management lines of business is generally a percentage of aggregate rent collections from properties, although many management agreements provide for a specified minimum management fee. Accordingly, the Company's success partially depends upon the performance of the properties it manages. The performance of these properties will depend upon the following factors, among others, many of which are partially or completely outside of the Company's control:

The Company's growth has depended significantly upon acquisitions, which may not be available in the future and may not perform as the Company expected.

        A significant component of the Company's growth has occurred through acquisitions. Any future growth through acquisitions will be partially dependent upon the continued availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions. However, future acquisitions may not be available at advantageous prices or upon favorable terms and conditions. In addition, acquisitions involve the risks that the businesses acquired will not perform in accordance with expectations and that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect.

        The Company has had, and may continue to experience, difficulties in integrating operations and accounting systems acquired from other companies. These difficulties include the diversion of management's attention from other business concerns and the potential loss of its key employees or those of the acquired operations. The Company believes that most acquisitions will initially have an adverse impact on operating and net income. In addition, the Company generally believes that there will be significant costs related to integrating information technology, accounting and management services and rationalizing personnel levels. Accordingly, the Company may not be able to effectively manage acquired businesses and some acquisitions may not have an overall benefit.

        The Company has several different accounting systems as a result of acquisitions it has made. If the Company is unable to fully integrate the accounting and other systems of the businesses it owns, it may not be able to effectively manage its acquired businesses. Moreover, the integration process itself may be disruptive to business, as it requires coordination of geographically diverse organizations and implementation of new accounting and information technology systems.

The Company's substantial leverage and debt service obligations could harm its ability to operate the business, remain in compliance with debt covenants and make payments on the outstanding debt.

        The Company is highly leveraged and has significant debt service obligations. For the year ended December 31, 2002, the Company's interest expense was $60.5 million. The Company's substantial level

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of indebtedness increases the possibility that it may be unable to generate sufficient cash to pay the principal of, interest on or other amounts due in respect of its indebtedness. In addition, the Company may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in the documents governing its indebtedness. If the Company incurs additional debt, the risks associated with its substantial leverage, including its ability to service its debt, would increase.

        The Company's substantial debt could have other important consequences, which include but are not limited to the following:

        The Company cannot be certain that its earnings will be sufficient to allow it to pay principal and interest on its debt and meet its other obligations. If the Company does not have sufficient earnings, it may be required to refinance all or part of its existing debt, sell assets, borrow more money or sell more securities, none of which the Company can guarantee it will be able to do.

The Company has numerous significant competitors, some of which may have greater financial resources than it does.

        The Company competes across a variety of business disciplines within the commercial real estate industry, including investment management, tenant representation, corporate services, construction and development management, property management, agency leasing, valuation and mortgage banking. In general, with respect to each of its business disciplines, the Company cannot assure that it will be able to continue to compete effectively, maintain its current fee arrangements or margin levels, or not encounter increased competition. Each of the business disciplines in which it competes is highly competitive on an international, national, regional and local level. Although the Company is one of the largest real estate services firms in the world in terms of revenue, its relative competitive position varies significantly across product and service categories and geographic areas. Depending on the product or service, the Company faces competition from other real estate service providers, institutional lenders, insurance companies, investment banking firms, investment managers and accounting firms. Many of its competitors are local or regional firms, which are substantially smaller than the Company; however,

8



they may be substantially larger on a local or regional basis. The Company is also subject to competition from other large national and multi-national firms.

The Company's international operations subject it to social, political and economic risks of doing business in foreign countries.

        The Company conducts a portion of its business and employs a substantial number of employees outside the US. In 2002, the Company generated approximately 27% of its revenue from operations outside the US. Circumstances and developments related to international operations that could negatively affect its business, financial condition or results of operations include, but are not limited to, the following factors:

        The Company has committed additional resources to expand its worldwide sales and marketing activities, to globalize its service offerings and products in selected markets and to develop local sales and support channels. If the Company is unable to successfully implement these plans, to maintain adequate long-term strategies that successfully manage the risks associated with its global business or to adequately manage operational fluctuations, its business, financial condition or results of operations could be harmed.

        In addition, the Company's international operations and, specifically, the ability of its non-US subsidiaries to dividend or otherwise transfer cash among its subsidiaries (including transfers of cash to pay interest and principal on its senior notes) may be affected by currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other things.

The Company's revenue and earnings may be adversely affected by foreign currency fluctuations.

        The Company's revenue from non-US operations has been primarily denominated in the local currency where the associated revenue was earned. During its fiscal year ended December 31, 2002, approximately 27% of its business was transacted in currencies of foreign countries, the majority of which included the Euro, the British Pound Sterling, the Hong Kong dollar, the Singapore dollar and the Australian dollar. Thus, the Company may experience significant fluctuations in revenues and earnings because of corresponding fluctuations in foreign currency exchange rates.

        The Company has made significant acquisitions of non-US companies and may acquire additional foreign companies in the future. As the Company increases its foreign operations, fluctuations in the value of the US dollar relative to the other currencies in which the Company may generate earnings

9



could adversely affect its business, operating results and financial condition. Due to the constantly changing currency exposures to which the Company is subject and the volatility of currency exchange rates, it cannot predict the effect of exchange rate fluctuations upon future operating results. In addition, fluctuations in currencies relative to the US dollar may make it more difficult to perform period-to-period comparisons of the Company's reported results of operations.

        From time to time, the Company's management uses currency hedging instruments, including foreign currency forward and option contracts and borrows in foreign currency. Economic risks associated with these hedging instruments include unexpected fluctuations in inflation rates, which impact cash flow relative to paying down debt and unexpected changes in the underlying net asset position. These hedging activities may also not be effective.

A significant portion of the Company's operations are concentrated in California and its business could be harmed if the economic downturn continues in the California real estate market.

        For the year ended December 31, 2002, approximately $215.3 million, or 29%, of the $745.8 million in total sales and lease revenue, including revenue from investment property sales, was generated from transactions originating in the State of California. As a result of the geographic concentration in California, a continuation of the economic downturn in the California commercial real estate markets and in the local economies in San Diego, Los Angeles or Orange County could further harm the results of operations.

The Company's co-investment activities subject it to real estate investment risks which could cause fluctuations in earnings and cash flow.

        An important part of the strategy for the investment management business involves investing the Company's capital in certain real estate investments with its clients. As of December 31, 2002, the Company had committed an additional $22.6 million to fund future co-investments. Participation in real estate transactions through co-investment activity could increase fluctuations in earnings and cash flow. Other risks associated with these activities include, but are not limited to, the following:

The Company may incur liabilities related to its subsidiaries being general partners of numerous general and limited partnerships.

        The Company has subsidiaries that are general partners in numerous general and limited partnerships that invest in or manage real estate assets in connection with its co-investments, including several partnerships involved in the acquisition, rehabilitation, subdivision and sale of multi-tenant industrial business parks. Any subsidiary that is a general partner is potentially liable to its partners and for the obligations of the partnership, including those obligations related to environmental contamination of properties owned or managed by the partnership. If the Company's exposure as a general partner is not limited, or if the exposure as a general partner expands in the future, any resulting losses may harm the Company's business, financial condition or results of operations.

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The Company's joint venture activities involve unique risks that are often outside of its control, which if realized, could harm its business.

        The Company has utilized joint ventures for large commercial investments, initiatives in Internet-related technology and local brokerage partnerships. In the future, the Company may acquire interests in additional general and limited partnerships and other joint ventures formed to own or develop real property or interests in real property. The Company has acquired and may continue to acquire minority interests in joint ventures. Additionally, it may also acquire interests as a passive investor without rights to actively participate in management of the joint ventures. Investments in joint ventures involve additional risks, including, but not limited to, the following:

        If a joint venture participant acts contrary to the Company's interest, it could harm the Company's business, results of operations and financial condition.

The Company's success depends upon the retention of its senior management, as well as its ability to attract and retain qualified and experienced employees.

        The Company's continued success is highly dependent upon the efforts of its executive officers and key employees. The only members of senior management that are parties to employment agreements are Raymond Wirta, the Chief Executive Officer; Brett White, the President; and Kenneth Kay, the Chief Financial Officer. If any of the key employees leave and the Company is unable to quickly hire and integrate a qualified replacement, business and results of operations may suffer. In addition, the growth of the business is largely dependent upon the Company's ability to attract and retain qualified personnel in all areas of the business, including brokerage and property management personnel. If the Company is unable to attract and retain these qualified personnel, growth may be limited, and business and operating results could suffer.

If the Company fails to comply with laws and regulations applicable to real estate brokerage and mortgage transactions and other segments of its business, it may incur significant financial penalties.

        Due to the broad geographic scope of the Company's operations and the numerous forms of real estate services performed, the Company is subject to numerous federal, state and local laws and regulations specific to the services performed. For example, the brokerage of real estate sales and leasing transactions requires the Company to maintain brokerage licenses in each state in which the Company operates. If the Company fails to maintain its licenses or conducts brokerage activities without a license, it may be required to pay fines, return commissions received or have licenses suspended. In addition, because the size and scope of real estate sales transactions have increased significantly during the past several years, both the difficulty of ensuring compliance with the numerous state licensing regimes and the possible loss resulting from non-compliance have increased. Furthermore, the laws and regulations applicable to the Company's business, both in the US and in foreign countries, may change in ways that materially increase the costs of compliance.

The Company may have liabilities in connection with real estate brokerage and property management activities.

        As a licensed real estate broker, the Company and its licensed employees are subject to statutory due diligence, disclosure and standard-of-care obligations. Failure to fulfill these obligations could subject the Company or its employees to litigation from parties who purchased, sold or leased

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properties they brokered or managed. The Company could become subject to claims by participants in real estate sales claiming that it did not fulfill its statutory obligations as a broker.

        In addition, in the Company's property management business, it hires and supervises third party contractors to provide construction and engineering services for its managed properties. While the Company's role is limited to that of a supervisor, it may be subjected to claims for construction defects or other similar actions. Adverse outcomes of property management litigation could negatively impact the Company's business, financial condition or results of operations.

The Company's results of operations vary significantly among quarters, which makes comparison of its quarterly results difficult.

        A significant portion of the Company's revenue is seasonal. Historically, this seasonality has caused the Company's revenue, operating income, net income and cash flow from operating activities to be lower in the first two quarters and higher in the third and fourth quarters of each year. The concentration of earnings and cash flow in the fourth quarter is due to an industry-wide focus on completing transactions toward the fiscal year-end while incurring constant, non-variable expenses throughout the year.

Employees

        At December 31, 2002, the Company had approximately 9,500 employees. The Company believes that relations with its employees are good.


Item 2. Properties

        The Company leases the following offices:

Location

  Sales Offices
  Corporate Offices
  Total
Americas   134   2   136
Europe, Middle East and Africa   43   1   44
Asia Pacific   25   1   26
   
 
 
  Total   202   4   206
   
 
 

        The Company does not own any offices, which is consistent with its strategy to lease instead of own. In general, these offices are fully utilized. There is adequate alternative office space available at acceptable rental rates to meet the Company's needs, although rental rates in some markets may negatively affect the Company's profits in those markets.


Item 3. Legal Proceedings

        The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. Management believes that any liability that may result from disposition of these lawsuits will not have a material effect on the Company's consolidated financial position or results of operations.


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

        There were no matters submitted to a vote of security holders during the fourth quarter of 2002.

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PART II

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

        The Company's common stock is not publicly traded on any exchange or in any market. At February 28, 2003, the Company had seventy-eight record holders of its Class A common stock and ten record holders of its Class B common stock. The Company has not declared any cash dividends on its common stock. The Company's existing credit agreement restricts its ability to pay dividends on its common stock, and the Company does not expect to pay dividends in the near future.

        From November 7, 1997 to July 20, 2001, the common stock of CB Richard Ellis Services, Inc. (CBRE) traded on the New York Stock Exchange (NYSE) under the symbol "CBG." On July 20, 2001, CBRE merged with a subsidiary of the Company, with CBRE as the surviving corporation, and the common stock of CBRE was delisted from the NYSE. The Company owns all of the issued and outstanding capital stock of CBRE. CBRE has never declared any cash dividends on its capital stock.

        The following table sets forth information as of December 31, 2002 with respect to compensation plans under which equity securities of the Company are authorized for issuance:

 
  (I)
  (II)
  (III)
Plan Category

  Number of securities
to be issued upon
exercise of outstanding
options and warrants

  Weighted-average
exercise price of
outstanding options
and warrants

  Number of securities
remaining available for
future issuance under
plans [excluding
securities listed in
column (I)]

Equity compensation plans approved by shareholders   1,707,076   $ 18.10   5,048,401
Equity compensation plans not approved by shareholders        
   
 
 
Total   1,707,076   $ 18.10   5,048,401
   
 
 


Item 6. Selected Financial Data

        The following selected financial data has been derived from the consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.

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SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except share data)

 
  Company
  Company
  Predecessor
  Predecessor
  Predecessor
  Predecessor
 
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

 
 
  Twelve
Months
Ended
December 31,
2002

  February 20,
2001
(inception)
through
December 31,
2001(1)

  Period from
January 1, 2001
through
July 20, 2001

  Twelve
Months
Ended
December 31,
2000

  Twelve
Months
Ended
December 31,
1999

  Twelve
Months
Ended
December 31,
1998

 
STATEMENT OF OPERATIONS DATA(2):                                      
Revenue   $ 1,170,277   $ 562,828   $ 607,934   $ 1,323,604   $ 1,213,039   $ 1,034,503  
Operating income (loss)   $ 106,062   $ 62,732   $ (14,174 ) $ 107,285   $ 76,899   $ 78,476  
Interest expense, net   $ 57,229   $ 27,290   $ 18,736   $ 39,146   $ 37,438   $ 27,993  
Net income (loss)   $ 18,727   $ 17,426   $ (34,020 ) $ 33,388   $ 23,282   $ 24,557  
Basic EPS (3)   $ 1.25   $ 2.22   $ (1.60 ) $ 1.60   $ 1.11   $ (0.38 )
Weighted average shares outstanding for basic EPS (3) (4)     15,025,308     7,845,004     21,306,584     20,931,111     20,998,097     20,136,117  
Diluted EPS (3)   $ 1.23   $ 2.20   $ (1.60 ) $ 1.58   $ 1.10   $ (0.38 )
Weighted average shares outstanding for diluted EPS (3) (4)     15,222,111     7,909,797     21,306,584     21,097,240     21,072,436     20,136,117  
OTHER DATA:                                      
EBITDA, excluding merger-related and other nonrecurring charges (5) (6)   $ 130,712   $ 81,372   $ 33,609   $ 150,484   $ 117,369   $ 127,246  
Net cash provided by (used in) operating activities   $ 64,882   $ 91,334   $ (120,230 ) $ 80,859   $ 70,340   $ 76,005  
Net cash used in investing activities   $ (24,130 ) $ (261,393 ) $ (12,139 ) $ (32,469 ) $ (23,096 ) $ (222,911 )
Net cash (used in) provided by financing activities   $ (17,838 ) $ 213,831   $ 126,230   $ (53,523 ) $ (37,721 ) $ 119,438  

       

 
  Company
  Company
  Predecessor
  Predecessor
  Predecessor
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

 
  December 31,
2002

  December 31,
2001

  December 31,
2000

  December 31,
1999

  December 31,
1998

BALANCE SHEET DATA:                              
Cash and cash equivalents   $ 79,701   $ 57,450   $ 20,854   $ 27,844   $ 19,551
Total assets   $ 1,324,876   $ 1,354,512   $ 963,105   $ 929,483   $ 856,892
Long-term debt   $ 511,133   $ 522,063   $ 303,571   $ 357,872   $ 373,691
Total liabilities   $ 1,067,920   $ 1,097,693   $ 724,018   $ 715,874   $ 660,175
Total stockholders' equity   $ 251,341   $ 252,523   $ 235,339   $ 209,737   $ 190,842
Number of shares outstanding (4)     14,307,893     14,380,414     20,605,023     20,435,692     20,636,134

Note: The Company has not declared any cash dividends on its common stock for the periods shown.

(1)
The results include the activities of CB Richard Ellis Services, Inc. (CBRE), from July 20, 2001, the date of the 2001 Merger.

(2)
The results include the activities of REI from April 17, 1998 and Hillier Parker from July 7, 1998. For the year ended December 31, 1998, basic and diluted loss per share include a deemed dividend of $32.3 million on the repurchase of CBRE's preferred stock.

(3)
EPS represents earnings (loss) per share. See Earnings Per Share Information in Note 16 of Notes to Consolidated Financial Statements.

(4)
For the period from February 20, 2001 (inception) through December 31, 2001 the 7,845,004 and the 7,909,797 represent the weighted average shares outstanding for basic and diluted earnings per share, respectively. These balances take into consideration the lower number of shares outstanding prior to the merger with CBRE. The 14,380,414 represents the outstanding number of shares at December 31, 2001.

14


(5)
EBITDA, excluding merger-related and other nonrecurring charges, represents earnings before net interest expense, income taxes, depreciation and amortization and excludes the impact of merger-related and other nonrecurring charges, if any. Management believes that the presentation of EBITDA, excluding merger-related and other nonrecurring charges, will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash generated (subject to the payment of interest and income taxes) that can be used to service debt and for other required or discretionary purposes. Additionally, many of the Company's debt covenants are based upon EBITDA, excluding merger-related and other nonrecurring charges. Net cash that will be available to the Company for discretionary purposes represents remaining cash after debt service and other cash requirements, such as capital expenditures, are deducted from EBITDA, excluding merger-related and other nonrecurring charges. EBITDA, excluding merger-related and other nonrecurring charges, should not be considered as an alternative to (i) operating income determined in accordance with accounting principles generally accepted in the United States of America or (ii) operating cash flow determined in accordance with accounting principles generally accepted in the United States of America. The Company's calculation of EBITDA, excluding merger-related and other nonrecurring charges, may not be comparable to similarly titled measures reported by other companies.

        EBITDA, excluding merger-related and other nonrecurring charges, is calculated as follows:

 
  Company
  Company
  Predecessor
  Predecessor
  Predecessor
  Predecessor
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

 
  Twelve
Months
Ended
December 31,
2002

  February 20,
2001
(inception)
through
December 31,
2001

  Period from
January 1, 2001
through
July 20, 2001

  Twelve
Months
Ended
December 31,
2000

  Twelve
Months
Ended
December 31,
1999

  Twelve
Months
Ended
December 31,
1998

 
  (Dollars in thousands)

Operating income (loss)   $ 106,062   $ 62,732   $ (14,174 ) $ 107,285   $ 76,899   $ 78,476
Add: Depreciation and amortization     24,614     12,198     25,656     43,199     40,470     32,185
   
 
 
 
 
 
EDITDA     130,676     74,930     11,482     150,484     117,369     110,661
Add: Merger-related and other nonrecurring charges     36     6,442     22,127             16,585
   
 
 
 
 
 

EBITDA, excluding merger-related and other nonrecurring charges

 

$

130,712

 

$

81,372

 

$

33,609

 

$

150,484

 

$

117,369

 

$

127,246
   
 
 
 
 
 
(6)
Nonrecurring charges are primarily comprised of the write-off of assets, primarily e-business investments, as well as severance costs.


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

Introduction

        Management's discussion and analysis of financial condition, results of operations, liquidity and capital resources contained within this report on Form 10-K is more clearly understood when read in conjunction with the Notes to the Consolidated Financial Statements. The Notes to the Consolidated Financial Statements elaborate on certain terms that are used throughout this discussion and provide information about the Company and the basis of presentation used in this report on Form 10-K.

        The Company is one of the world's largest global commercial real estate services firms in terms of revenue, offering a full range of services to commercial real estate occupiers, owners, lenders and investors. Operations are conducted in 47 countries through 206 offices with approximately 9,500 employees. The Company has worldwide capabilities to assist buyers in the purchase and sellers in the disposition of commercial property, to assist tenants in finding available space and owners in finding qualified tenants, to provide valuation and appraisals for real estate property, to assist in the placement of financing for commercial real estate, to provide commercial loan servicing, to provide research and consulting services, to help institutional investors manage commercial real estate portfolios, to provide property and facilities management services and to serve as the outsource service provider to corporations seeking to be relieved of the responsibility for managing their real estate operations.

15



        A significant portion of the Company's revenue is seasonal. Historically, this seasonality has caused the Company's revenue, operating income, net income and cash flow from operating activities to be lower in the first two quarters and higher in the third and fourth quarters of each year. The concentration of earnings and cash flow in the fourth quarter is due to an industry-wide focus on completing transactions toward the fiscal year-end while incurring constant, non-variable expenses throughout the year. In addition, the Company's operations are directly affected by actual and perceived trends in various national and economic conditions, including interest rates, the availability of credit to finance commercial real estate transactions and the impact of tax laws. The international operations are subject to political instability, currency fluctuations and changing regulatory environments. To date, the Company does not believe that general inflation has had a material impact upon its operations. Revenue, commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand rather than general inflation.

        On July 20, 2001, the Company acquired CB Richard Ellis Services, Inc. (CBRE), (the 2001 Merger), pursuant to an Amended and Restated Agreement and Plan of Merger, dated May 31, 2001 (the 2001 Merger Agreement), among the Company, CBRE and Blum CB Corp. (Blum CB), a wholly owned subsidiary of the Company. Blum CB was merged with and into CBRE, with CBRE being the surviving corporation. At the effective time of the 2001 Merger, CBRE became a wholly owned subsidiary of the Company.

        The results of operations, including the segment operations and cash flows, for the year ended December 31, 2001 have been derived by combining the results of operations and cash flows of the Company for the period from February 20, 2001 (inception) to December 31, 2001 with the results of operations and cash flows of CBRE, prior to the 2001 Merger, from January 1, 2001 through July 20, 2001, the date of the 2001 Merger. The results of operations and cash flows of CBRE prior to the 2001 Merger incorporated in the following discussion are the historical results and cash flows of CBRE, the predecessor to the Company. These CBRE results do not reflect any purchase accounting adjustments, which are included in the results of the Company subsequent to the 2001 Merger. Due to the effects of purchase accounting applied as a result of the 2001 Merger and the additional interest expense associated with the debt incurred to finance the 2001 Merger, the results of operations of the Company may not be comparable in all respects to the results of operations for CBRE prior to the 2001 Merger. However, the Company's management believes a discussion of the 2001 operations is more meaningful by combining the results of the Company with the results of CBRE.

        On February 17, 2003, the Company entered into a merger agreement with Insignia Financial Group, Inc. Additional information regarding this transaction is included in the "Liquidity and Capital Resources" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations."

16



Results of Operations

        The following table sets forth items derived from the consolidated statements of operations for the years ended December 31, 2002, 2001 and 2000:

 
  Year Ended December 31
 
 
  2002
  2001
  2000
 
 
  (Dollars in thousands)

 
Revenue     1,170,277   100.0 %   1,170,762   100.0 %   1,323,604   100.0 %

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Commissions, fees and other incentives     554,942   47.4     547,577   46.8     628,097   47.4  
  Operating, administrative and other     493,949   42.2     512,632   43.8     551,528   41.7  
  Depreciation and amortization     24,614   2.1     37,854   3.2     43,199   3.3  
  Equity income from unconsolidated subsidiaries     (9,326 ) (0.8 )   (4,428 ) (0.4 )   (6,505 ) (0.5 )
  Merger-related and other nonrecurring charges     36       28,569   2.5        
   
 
 
 
 
 
 
Operating income     106,062   9.1     48,558   4.1     107,285   8.1  
Interest income     3,272   0.3     3,994   0.4     2,554   0.2  
Interest expense     60,501   5.2     50,020   4.3     41,700   3.2  
   
 
 
 
 
 
 
Income before provision for income taxes     48,833   4.2     2,532   0.2     68,139   5.1  
Provision for income taxes     30,106   2.6     19,126   1.6     34,751   2.6  
   
 
 
 
 
 
 
Net income (loss)   $ 18,727   1.6 % $ (16,594 ) (1.4 )% $ 33,388   2.5 %
   
 
 
 
 
 
 
EBITDA, excluding merger-related and other nonrecurring charges   $ 130,712   11.2 % $ 114,981   9.8 % $ 150,484   11.4 %
   
 
 
 
 
 
 

        EBITDA, excluding merger-related and other nonrecurring charges, is calculated as follows:

 
  Year Ended December 31
 
  2002
  2001
  2000
 
  (Dollars in thousands)

Operating income   $ 106,062   $ 48,558   $ 107,285
Add: Depreciation and amortization     24,614     37,854     43,199
   
 
 
EBITDA     130,676     86,412     150,484
Add: Merger-related and other nonrecurring charges     36     28,569    
   
 
 

EBITDA, excluding merger-related and other nonrecurring charges

 

$

130,712

 

$

114,981

 

$

150,484
   
 
 

        EBITDA, excluding merger-related and other nonrecurring charges, represents earnings before net interest expense, income taxes, depreciation and amortization and excludes the impact of merger-related and other nonrecurring charges, if any. Management believes that the presentation of EBITDA, excluding merger-related and other nonrecurring charges, will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash generated (subject to the payment of interest and income taxes) that can be used to service debt and for other required or discretionary purposes. Additionally, many of the Company's debt covenants are based upon EBITDA, excluding merger related and other nonrecurring charges. Net cash that will be available to the Company for discretionary purposes represents remaining cash after debt service and other cash requirements, such as capital expenditures, are deducted from EBITDA, excluding merger-related and other nonrecurring charges. EBITDA, excluding merger-related and other nonrecurring charges, should not be considered as an alternative to (i) operating income determined in accordance with accounting principles generally accepted in the United States of America or (ii) operating cash

17



flow determined in accordance with accounting principles generally accepted in the United States of America. The Company's calculation of EBITDA, excluding merger-related and other nonrecurring charges, may not be comparable to similarly titled measures reported by other companies.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

        The Company reported consolidated net income of $18.7 million for the year ended December 31, 2002 on revenue of $1,170.3 million as compared to a consolidated net loss of $16.6 million on revenue of $1,170.8 million for the year ended December 31, 2001.

        Revenue on a consolidated basis for the year ended December 31, 2002 was comparable to the year ended December 31, 2001. Declines in lease transaction revenue, principally in the Americas and Asia Pacific, combined with a nonrecurring prior year sale of mortgage fund contracts of $5.6 million, was mostly offset by higher worldwide sales transaction revenue, consulting fees, investment management fees and loan fees.

        Commissions, fees and other incentives on a consolidated basis totaled $554.9 million for the year ended December 31, 2002, an increase of $7.4 million or 1.3% from the year ended December 31, 2001. Commissions, fees and other incentives as a percentage of revenue increased slightly to 47.4% in the current year as compared to 46.8% in the prior year. This increase was primarily due to higher producer compensation within the Company's international operations associated with expanded international activities. These increases were partially offset by lower variable commissions, principally in the Americas, driven by lower lease transaction revenue.

        Operating, administrative and other expenses on a consolidated basis were $493.9 million for the year ended December 31, 2002, a decrease of $18.7 million or 3.6% as compared to the year ended December 31, 2001. This decrease was primarily driven by cost cutting measures and operational efficiencies from programs initiated in May 2001 as well as foreign currency transaction and settlement gains resulting from the weaker United States (US) dollar. These reductions were partially offset by an increase in bonuses and other incentives, primarily within the Company's international operations, due to higher results.

        Depreciation and amortization expense on a consolidated basis decreased by $13.2 million or 35.0% mainly due to the discontinuation of goodwill amortization after the 2001 Merger in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) and lower depreciation expense, principally due to lower capital expenditures in the current year. The year ended December 31, 2002 also included a reduction of amortization expense of $2.0 million arising from the adjustment of certain intangible assets to their estimated fair values as of the acquisition date as determined by independent third party appraisers in 2002.

        Equity income from unconsolidated subsidiaries increased by $4.9 million or 110.6% for the year ended December 31, 2002 as compared to the prior year, primarily due to improved performance from several domestic joint ventures.

        The year ended December 31, 2001 included merger-related and other nonrecurring charges on a consolidated basis of $28.6 million. These costs primarily consisted of merger-related costs of $18.3 million, the write-off of assets, primarily e-business investments, of $7.2 million as well as severance costs of $3.1 million related to the Company's cost reduction program instituted in May 2001.

        Consolidated interest expense was $60.5 million, an increase of $10.5 million or 21.0% over the year ended December 31, 2001. This was primarily attributable to the Company's change in debt structure as a result of the 2001 Merger.

        Income tax expense on a consolidated basis was $30.1 million for the year ended December 31, 2002 as compared to $19.1 million for the year ended December 31, 2001. The income tax provision

18



and effective tax rate were not comparable between periods due to effects of the 2001 Merger and the adoption of SFAS No. 142, which resulted in the elimination of the amortization of goodwill. In addition, the decline in the market value of assets associated with the deferred compensation plan for which no tax benefit was realized contributed to an increased effective tax rate.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

        The Company reported a consolidated net loss of $16.6 million for the year ended December 31, 2001 on revenue of $1,170.8 million compared to consolidated net income of $33.4 million on revenue of $1,323.6 million for the year ended December 31, 2000. The 2001 results include a nonrecurring sale of mortgage fund management contracts of $5.6 million. The 2000 results include a nonrecurring sale of certain non-strategic assets of $4.7 million.

        Revenue on a consolidated basis decreased by $152.8 million or 11.5% during the year ended December 31, 2001 as compared to the year ended December 31, 2000. This was mainly driven by a $98.2 million decrease in lease transaction revenue and a $62.8 million decline in sales transaction revenue during 2001. The lower revenue was primarily attributable to the Company's North American operation. However, the European and Asian operations also experienced lower sales and lease transaction revenue as compared to 2000. These decreases were slightly offset by a $6.4 million or 11.0% increase in loan origination and servicing fees as well as a $6.0 million or 8.1% increase in appraisal fees driven by increased refinancing activities due to a decline in interest rates in the US and increased fees in the European operation.

        Commissions, fees and other incentives on a consolidated basis totaled $547.6 million, a decrease of $80.5 million or 12.8% for the year ended December 31, 2001 as compared to the prior year. This decrease was primarily due to the lower sales and lease transaction revenue within North America. This decline in revenue also resulted in lower variable commissions expense within this region as compared to 2000. This was slightly offset by producer compensation within the international operations, which is typically fixed in nature and does not decrease as a result of lower revenue. Accordingly, commissions, fees and other incentives as a percentage of revenue decreased slightly to 46.8% for 2001 as compared to 47.4% for 2000.

        Operating, administrative and other expenses on a consolidated basis were $512.6 million, a decrease of $38.9 million or 7.1% for the year ended December 31, 2001 as compared to the prior year. This decrease was due to cost cutting measures and operational efficiencies from programs initiated in May 2001. An organizational restructure was also implemented after the 2001 Merger transaction that included the reduction of administrative staff in corporate and divisional headquarters and the scaling back of unprofitable operations. In addition, bonus incentives and profit share declined due to the Company's lower results.

        Depreciation and amortization expense on a consolidated basis decreased by $5.3 million or 12.4% primarily due to the discontinuation of goodwill amortization after the 2001 Merger in accordance with SFAS No. 142.

        Equity income from unconsolidated subsidiaries decreased by $2.1 million or 31.9% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, primarily due to decreased results from several domestic joint ventures.

        Merger-related and other nonrecurring charges on a consolidated basis were $28.6 million for the year ended December 31, 2001. This included merger-related costs of $18.3 million, the write-off of assets, primarily e-business investments, of $7.2 million and severance costs of $3.1 million attributable to the Company's cost reduction program instituted in May 2001.

        Consolidated interest expense was $50.0 million, an increase of $8.3 million or 20.0% for the year ended December 31, 2001 as compared to the year ended December 31, 2000. This was attributable to the Company's increased debt as a result of the 2001 Merger.

19


        Provision for income taxes on a consolidated basis was $19.1 million for the year ended December 31, 2001 as compared to a provision for income taxes of $34.8 million for the year ended December 31, 2000. The income tax provision and effective tax rate were not comparable between periods due to the 2001 Merger. In addition, the Company adopted SFAS No. 142, which resulted in the elimination of the amortization of goodwill.

Segment Operations

        In the third quarter of 2001, subsequent to the 2001 Merger transaction, the Company reorganized its business segments as part of its efforts to reduce costs and streamline its operations. The Company reports its operations through three geographically organized segments: (1) Americas, (2) Europe, Middle East and Africa (EMEA) and (3) Asia Pacific. The Americas consists of operations located in the US, Canada, Mexico, and Central and South America. EMEA mainly consists of operations in Europe, while Asia Pacific includes operations in Asia, Australia and New Zealand. The Americas 2001 results include a nonrecurring sale of mortgage fund contracts of $5.6 million as well as merger-related and other nonrecurring charges of $26.9 million. The Americas 2000 results include a nonrecurring sale of certain non-strategic assets of $4.7 million. Asia Pacific's 2001 results include merger-related and other nonrecurring charges of $1.2 million. The following table summarizes the revenue, costs and expenses and operating income (loss) by operating segment for the years ended December 31, 2002, 2001 and 2000:

 
  Year Ended December 31
 
 
  2002
  2001
  2000
 
 
  (Dollars in thousands)

 
Americas                                
Revenue   $ 896,064   100.0 % $ 928,799   100.0 % $ 1,074,080   100.0 %

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Commissions, fees and other incentives     438,842   48.9     448,813   48.4     530,284   49.3  
  Operating, administrative and other     367,312   41.0     388,645   41.8     422,698   39.4  
  Depreciation and amortization     16,958   1.9     27,452   3.0     28,600   2.7  
  Equity income from unconsolidated subsidiaries     (8,425 ) (0.9 )   (3,808 ) (0.4 )   (5,553 ) (0.5 )
  Merger-related and other nonrecurring charges     36       26,923   2.8        
   
 
 
 
 
 
 
Operating income   $ 81,341   9.1 % $ 40,774   4.4 % $ 98,051   9.1 %
   
 
 
 
 
 
 

EBITDA, excluding merger-related and other nonrecurring charges

 

$

98,335

 

11.0

%

$

95,149

 

10.2

%

$

126,651

 

11.8

%
   
 
 
 
 
 
 
EMEA                                
Revenue   $ 182,222   100.0 % $ 161,306   100.0 % $ 164,539   100.0 %

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Commissions, fees and other incentives     75,475   41.4     63,343   39.3     61,194   37.1  
  Operating, administrative and other     84,963   46.6     81,728   50.6     84,172   51.2  
  Depreciation and amortization     4,579   2.5     6,492   4.0     9,837   6.0  
  Equity income from unconsolidated subsidiaries     (82 )     (2 )     (3 )  
  Merger-related and other nonrecurring charges           451   0.3        
   
 
 
 
 
 
 
Operating income   $ 17,287   9.5 % $ 9,294   5.8 % $ 9,339   5.7 %
   
 
 
 
 
 
 
EBITDA, excluding merger-related and other nonrecurring charges   $ 21,866   12.0 % $ 16,237   10.1 % $ 19,176   11.7 %
   
 
 
 
 
 
 
Asia Pacific                                
Revenue   $ 91,991   100.0 % $ 80,657   100.0 % $ 84,985   100.0 %

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Commissions, fees and other incentives     40,625   44.2     35,421   43.9     36,619   43.1  
  Operating, administrative and other     41,674   45.3     42,259   52.4     44,658   52.5  
  Depreciation and amortization     3,077   3.3     3,910   4.9     4,762   5.6  
  Equity income from unconsolidated subsidiaries     (819 ) (0.9 )   (618 ) (0.8 )   (949 ) (1.1 )
  Merger-related and other nonrecurring charges           1,195   1.5        
Operating income (loss)   $ 7,434   8.1 % $ (1,510 ) (1.9 )% $ (105 ) (0.1 )%
   
 
 
 
 
 
 
EBITDA, excluding merger-related and other nonrecurring charges   $ 10,511   11.4 % $ 3,595   4.5 % $ 4,657   5.5 %
   
 
 
 
 
 
 

20


        EBITDA, excluding merger-related and other nonrecurring charges, is calculated as follows:

 
  Year Ended December 31
 
 
  2002
  2001
  2000
 
 
  (Dollars in thousands)

 
Americas                    
Operating income   $ 81,341   $ 40,774   $ 98,051  
Add: Depreciation and amortization     16,958     27,452     28,600  
   
 
 
 
EBITDA     98,299     68,226     126,651  
Add: Merger-related and other nonrecurring charges     36     26,923      
   
 
 
 
EBITDA, excluding merger-related and other nonrecurring charges   $ 98,335   $ 95,149   $ 126,651  
   
 
 
 
EMEA                    
Operating income   $ 17,287   $ 9,294   $ 9,339  
Add: Depreciation and amortization     4,579     6,492     9,837  
   
 
 
 
EBITDA     21,866     15,786     19,176  
Add: Merger-related and other nonrecurring charges         451      
   
 
 
 
EBITDA, excluding merger-related and other nonrecurring charges   $ 21,866   $ 16,237   $ 19,176  
   
 
 
 
Asia Pacific                    
Operating income (loss)   $ 7,434   $ (1,510 ) $ (105 )
Add: Depreciation and amortization     3,077     3,910     4,762  
   
 
 
 
EBITDA     10,511     2,400     4,657  
Add: Merger-related and other nonrecurring charges         1,195      
   
 
 
 
EBITDA, excluding merger-related and other nonrecurring charges   $ 10,511   $ 3,595   $ 4,657  
   
 
 
 

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Americas

        Revenue decreased by $32.7 million or 3.5% for the year ended December 31, 2002 as compared to the year ended December 31, 2001, primarily driven by lower lease transaction revenue, partially offset by an increase in sales transaction revenue and loan fees. The lease transaction revenue decrease was primarily due to a lower average value per transaction partially offset by a higher number of transactions. The sales transaction revenue increase was driven by a higher number of transactions as well as a higher average value per transaction. Loan fees also increased compared to the prior year principally due to an increase in the number of transactions. Commissions, fees and other incentives decreased by $10.0 million or 2.2% for the year ended December 31, 2002 as compared to the year ended December 31, 2001, caused primarily by lower variable commissions due to lower lease transaction revenue. Commissions, fees and other incentives as a percentage of revenue were relatively flat when compared to the prior year at approximately 48.9%. Operating, administrative and other expenses decreased by $21.3 million or 5.5% as a result of cost reduction and efficiency measures, the organizational restructure implemented after the 2001 Merger, and foreign currency transaction and settlement gains resulting from the weaker US dollar.

EMEA

        Revenue increased by $20.9 million or 13.0% for the year ended December 31, 2002 as compared to the year ended December 31, 2001. This was mainly driven by higher sales transaction revenue across Europe as well as higher lease transaction revenue and investment management fees in France. Commissions, fees and other incentives increased by $12.1 million or 19.2% due to higher producer

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compensation as a result of increased revenue arising from expanded activities in the United Kingdom (UK), France, Germany, Italy and Spain. Operating, administrative and other expenses increased by $3.2 million or 4.0% mainly attributable to higher incentives due to increased results, higher occupancy costs and consulting fees.

Asia Pacific

        Revenue increased by $11.3 million or 14.1% for the year ended December 31, 2002 as compared to the year ended December 31, 2001. This increase was primarily driven by higher investment management fees in Japan and an increase in overall revenue in Australia and New Zealand, partially offset by lower revenues as a result of conversions of small, wholly owned offices to affiliate offices elsewhere in Asia. Commissions, fees and other incentives increased by $5.2 million or 14.7% primarily driven by higher producer compensation expense due to increased personnel requirements in Australia, China and New Zealand, slightly offset by lower commissions due to conversions to affiliate offices elsewhere in Asia. Operating, administrative and other expenses decreased by $0.6 million or 1.4% primarily as a result of conversions to affiliate offices. This decrease was mostly offset by an increased accrual for bonuses due to higher results in Australia and New Zealand.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Americas

        Revenue decreased by $145.3 million or 13.5% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, primarily driven by the softening global economy as well as the tragic events of September 11, 2001. Lease transaction revenue decreased by $85.3 million and sales transaction revenue declined by $55.5 million due to a lower number of transactions completed as well as a lower average value per transaction during 2001 as compared to 2000. Consulting and referral fees also decreased by $12.1 million or 20.0% as compared to 2000. These declines were slightly offset by an increase in loan origination and servicing fees of $6.4 million as well as higher appraisal fees of $4.4 million driven by increased refinancing activities due to the low interest rate environment in North America. Commissions, fees and other incentives decreased by $81.5 million or 15.4% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, caused primarily by the lower lease transaction and sales transaction revenue. The decline in revenue also resulted in lower variable commissions expense. As a result, commissions, fees and other incentives as a percentage of revenue decreased from 49.3% in 2000 to 48.4% in 2001. Operating, administrative and other expenses decreased by $34.1 million or 8.1% as a result of cost reduction and efficiency measures initiated in May 2001 as well as the organizational restructure implemented after the 2001 Merger. Key executive bonuses and profit share also declined due to the lower results.

EMEA

        Revenue decreased by $3.2 million or 2.0% for the year ended December 31, 2001 as compared to the year ended December 31, 2000. This was mainly driven by lower sales transaction and lease transaction revenue due to the overall weakness in the European economy, particularly in France and Germany. This was slightly offset by higher consulting and referral fees in the UK as well as an overall increase in appraisal fees throughout Europe. Commissions, fees and other incentives increased by $2.1 million or 3.5% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, primarily due to a higher number of producers, mainly in the UK. Producer compensation in EMEA is typically fixed in nature and does not decrease with a decline in revenue. Operating, administrative and other expenses decreased by $2.4 million or 2.9% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, mainly attributable to decreased bonuses and other incentives due to lower 2001 results.

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Asia Pacific

        Revenue decreased by $4.3 million or 5.1% for the year ended December 31, 2001 as compared to the year ended December 31, 2000. This was primarily driven by lower lease transaction revenue due to the weak economy in China and Singapore. Operating, administrative and other expenses decreased by $2.4 million or 5.4% for the year ended December 31, 2001 as compared to the year ended December 31, 2000. The decrease was primarily due to lower personnel requirements and other cost containment measures put in place during May 2001 as well as the organizational restructure implemented after the 2001 Merger.

Liquidity and Capital Resources

        Pursuant to the terms of the 2001 Merger Agreement, each issued and outstanding share of common stock of CBRE was converted into the right to receive $16.00 in cash, except for: (i) shares of common stock of CBRE owned by the Company and Blum CB immediately prior to the 2001 Merger, totaling 7,967,774 shares, which were cancelled, (ii) treasury shares and shares of common stock of CBRE owned by any of its subsidiaries which were cancelled and (iii) shares of common stock of CBRE held by stockholders who perfected appraisal rights for such shares in accordance with Delaware law. All shares of common stock of CBRE outstanding prior to the 2001 Merger were acquired by the Company and subsequently cancelled. Immediately prior to the 2001 Merger, the following, collectively referred to as the buying group, contributed to the Company all the shares of CBRE's common stock that he or it directly owned in exchange for an equal number of shares of Class B common stock of the Company: Blum Strategic Partners, L.P. (formerly known as RCBA Strategic Partners, L.P.), FS Equity Partners III, L.P. (FSEP), a Delaware limited partnership, FS Equity Partners International, L.P. (FSEP International), a Delaware limited partnership, The Koll Holding Company, a California corporation, Frederic V. Malek, a director of the Company and CBRE, Raymond E. Wirta, the Chief Executive Officer and a director of the Company and CBRE, and Brett White, the President and a director of the Company and CBRE. Such shares of common stock of CBRE, which totaled 7,967,774 shares of common stock, were then cancelled. In addition, the Company offered to purchase for cash, options outstanding to acquire common stock of CBRE at a purchase price per option equal to the greater of the amount by which $16.00 exceeded the exercise price of the option, if at all, or $1.00. In connection with the 2001 Merger, CBRE purchased its outstanding options on behalf of the Company, which were recorded as merger-related and other nonrecurring charges by CBRE in the period from January 1, 2001 through July 20, 2001.

        The funding to complete the 2001 Merger, as well as the refinancing of substantially all of the outstanding indebtedness of CBRE, was obtained through: (i) the cash contribution of $74.8 million from the sale of Class B common stock of the Company for $16.00 per share, (ii) the sale of shares of Class A common stock of the Company for $16.00 per share to employees and independent contractors of CBRE, (iii) the sale of 625,000 shares of Class A common stock of the Company to the California Public Employees' Retirement System for $16.00 per share, (iv) the issuance and sale by the Company of 65,000 units for $65.0 million to DLJ Investment Funding, Inc. and other purchasers, which units consist of $65.0 million in aggregate principal amount of 16% Senior Notes due July 20, 2011 and 339,820 shares of Class A common stock of the Company, (v) the issuance and sale by Blum CB of $229.0 million in aggregate principal amount of 111/4% Senior Subordinated Notes due June 15, 2011 for $225.6 million (which were assumed by CBRE in connection with the 2001 Merger) and (vi) borrowings by CBRE under a new $325.0 million senior credit agreement with Credit Suisse First Boston (CSFB) and other lenders.

        Following the 2001 Merger, the common stock of CBRE was delisted from the New York Stock Exchange. CBRE also successfully completed a tender offer and consent solicitation for all of the outstanding principal amount of its 87/8% Senior Subordinated Notes due 2006 (the Subordinated Notes). The Subordinated Notes were purchased at $1,079.14 for each $1,000 principal amount of

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Subordinated Notes, which included a consent payment of $30.00 per $1,000 principal amount of Subordinated Notes. The Company also repaid the outstanding balance of CBRE's existing revolving credit facility. The Company entered into the 2001 Merger in order to enhance the flexibility to operate CBRE's existing businesses and to develop new ones.

        On February 17, 2003, the Company, CBRE, Apple Acquisition Corp. (the Merger Sub) and Insignia Financial Group, Inc. (Insignia) entered into an Agreement and Plan of Merger (the Insignia Acquisition Agreement). Pursuant to the terms and subject to the conditions of the Insignia Acquisition Agreement, the Merger Sub will merge with and into Insignia, the separate existence of the Merger Sub will cease and Insignia will continue its existence as a wholly owned subsidiary of CBRE (the Insignia Acquisition).

        When the Insignia Acquisition becomes effective, each outstanding share of common stock of Insignia (other than the cancelled shares, dissenting shares and shares held by wholly owned subsidiaries of Insignia) will be converted into the right to receive $11.00 in cash, without interest, from the Merger Sub, subject to adjustments as provided in the Insignia Acquisition Agreement. At the same time, each outstanding share of common stock of the Merger Sub will be converted into one share of common stock of the surviving entity in the Insignia Acquisition.

        As of February 17, 2003, the transaction was valued at approximately $415.0 million, including the repayment of net debt and the redemption of preferred stock. In addition to Insignia shareholder approval, the transaction, which is expected to close in June 2003, is subject to the receipt of financing and regulatory approvals. The sale by Insignia on March 14, 2003 of its residential real estate services subsidiaries, Insignia Douglas Elliman LLC and Insignia Residential Group, Inc., to Montauk Battery Realty, LLC and Insignia's receipt of the cash proceeds from such sale will not affect the consideration to be paid in the Insignia Acquisition.

        The Company believes it can satisfy its non-acquisition obligations, as well as working capital requirements and funding of investments, with internally generated cash flow, borrowings under the revolving line of credit with CSFB and other lenders or any replacement credit facilities. In the near term, further material acquisitions, if any, that necessitate cash will require new sources of capital such as an expansion of the revolving credit facility and/or issuing additional debt or equity. The Company anticipates that its existing sources of liquidity, including cash flow from operations, will be sufficient to meet its anticipated non-acquisition cash requirements for the foreseeable future, but at a minimum for the next twelve months.

        Net cash provided by operating activities totaled $64.9 million for the current year, an increase of $93.8 million compared to the prior year. This increase was primarily due to improved 2002 earnings, as well as lower payments made in the current year for 2001 bonus and profit sharing as compared to the 2000 bonus and profit sharing payments made in the prior year.

        The Company utilized $24.1 million in investing activities during the current year, a decrease of $249.4 million compared to the prior year. This decrease was primarily due to the prior year payment of the purchase price and related expenses associated with the acquisition of CBRE by the Company. Capital expenditures of $14.3 million, net of concessions received, were lower than 2001 by $7.0 million driven primarily by efforts to reduce spending and improve cash flow. Capital expenditures for 2002 and 2001 consisted primarily of purchases of computer hardware and software and furniture and fixtures. The Company expects to have capital expenditures, net of concessions received, of approximately $28.8 million in 2003 due to leasehold improvements anticipated in New York and London.

        Net cash used in financing activities totaled $17.8 million for the year ended December 31, 2002, compared to cash provided by financing activities of $340.1 million for the year ended December 31,

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2001. This decrease was mainly attributable to the debt and equity financing required by the 2001 Merger in the prior year.

        The Company issued $229.0 million in aggregate principal amount of 111/4% Senior Subordinated Notes due June 15, 2011 (the Notes), which were issued and sold by Blum CB Corp. for approximately $225.6 million, net of discount, on June 7, 2001 and assumed by CBRE in connection with the 2001 Merger. The Notes are jointly and severally guaranteed on a senior subordinated basis by the Company and its domestic subsidiaries. The Notes require semi-annual payments of interest in arrears on June 15 and December 15, having commenced on December 15, 2001, and are redeemable in whole or in part on or after June 15, 2006 at 105.625% of par on that date and at declining prices thereafter. In addition, before June 15, 2004, the Company may redeem up to 35.0% of the originally issued amount of the Notes at 1111/4% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings. In the event of a change of control, the Company is obligated to make an offer to purchase the Notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest. The amounts included in the accompanying consolidated balance sheets, net of unamortized discount, were $225.9 million and $225.7 million at December 31, 2002 and 2001, respectively.

        The Company also entered into a $325.0 million Senior Credit Facility (the Credit Facility) with CSFB and other lenders. The Credit Facility is jointly and severally guaranteed by the Company and its domestic subsidiaries and is secured by substantially all of their assets. The Credit Facility includes the Tranche A term facility of $50.0 million, maturing on July 20, 2007; the Tranche B term facility of $185.0 million, maturing on July 18, 2008; and the revolving line of credit of $90.0 million, including revolving credit loans, letters of credit and a swingline loan facility, maturing on July 20, 2007. Borrowings under the Tranche A and revolving facility bear interest at varying rates based on the Company's option at either three-month LIBOR plus 2.50% to 3.25% or the alternate base rate plus 1.50% to 2.25% as determined by reference to the Company's ratio of total debt less available cash to EBITDA, which is defined in the debt agreement. Borrowings under the Tranche B facility bear interest at varying rates based on the Company's option at either three-month LIBOR plus 3.75% or the alternate base rate plus 2.75%. The alternate base rate is the higher of (1) CSFB's prime rate or (2) the Federal Funds Effective Rate plus one-half of one percent.

        The Tranche A facility will be repaid by July 20, 2007 through quarterly principal payments over six years, which total $7.5 million each year through June 30, 2003 and $8.75 million each year thereafter through July 20, 2007. The Tranche B facility requires quarterly principal payments of approximately $0.5 million, with the remaining outstanding principal due on July 18, 2008. The revolving line of credit requires the repayment of any outstanding balance for a period of 45 consecutive days commencing on any day in the month of December of each year as determined by the Company. The Company repaid its revolving credit facility as of November 5, 2002 and December 1, 2001, and at December 31, 2002 and 2001, the Company had no revolving line of credit principal outstanding. The total amount outstanding under the Credit Facility included in senior secured term loans and current maturities of long-term debt in the accompanying consolidated balance sheets was $221.0 million and $230.3 million at December 31, 2002 and 2001, respectively.

        The Company issued an aggregate principal amount of $65.0 million of 16.0% Senior Notes due on July 20, 2011 (the Senior Notes). The Senior Notes are unsecured obligations, senior to all current and future unsecured indebtedness, but subordinated to all current and future secured indebtedness of the Company. Interest accrues at a rate of 16.0% per year and is payable quarterly in cash in arrears. Interest may be paid in kind to the extent CBRE's ability to pay cash dividends is restricted by the terms of the Credit Facility. Additionally, interest in excess of 12.0% may, at the Company's option, be paid in kind through July 2006. The Company elected to pay in kind interest in excess of 12.0%, or 4.0%, that was payable on April 20, 2002, July 20, 2002 and October 20, 2002. The Senior Notes are redeemable at the Company's option, in whole or in part, at 116.0% of par commencing on July 20,

25



2001 and at declining prices thereafter. As of December 31, 2002, the redemption price was 112.8% of par. In the event of a change in control, the Company is obligated to make an offer to purchase all of the outstanding Senior Notes at 101.0% of par. The total amount included in the accompanying consolidated balance sheets was $61.9 million and $59.7 million, net of unamortized discount, at December 31, 2002 and 2001, respectively.

        The Senior Notes are solely the Company's obligation to repay. CBRE has neither guaranteed nor pledged any of its assets as collateral for the Senior Notes and is not obligated to provide cashflow to the Company for repayment of these Senior Notes. However, the Company has no substantive assets or operations other than its investment in CBRE to meet any required principal and interest payments on the Senior Notes. The Company will depend on CBRE's cash flows to fund principal and interest payments as they come due.

        The Notes, the Credit Facility and the Senior Notes all contain numerous restrictive covenants that, among other things, limit the Company's ability to incur additional indebtedness, pay dividends or distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, engage in transactions with affiliates, issue subsidiary equity and enter into consolidations or mergers. The credit facility requires the Company to maintain a minimum coverage ratio of interest and certain fixed charges and a maximum leverage and senior leverage ratio of earnings before interest, taxes, depreciation and amortization to funded debt. The Credit Facility requires the Company to pay a facility fee based on the total amount of the unused commitment.

        On March 12, 2002, Moody's Investor Service downgraded the Company's senior secured term loans and Senior Subordinated Notes to B1 from Ba3 and to B3 from B2, respectively. On February 23, 2003, Moody's Investor Service confirmed the ratings of the Company's senior secured term loans and Senior Subordinated Notes at B1 and B3, respectively. On May 21, 2002 Standard and Poor's Ratings Service affirmed the ratings of the Company's senior secured term loans and Senior Subordinated Notes at BB- and B, respectively, but revised the outlook from stable to negative. On February 19, 2003, Standard and Poor's Ratings Service placed its ratings on the Company on CreditWatch with negative implications in response to the Company's announced acquisition of Insignia. Neither the Moody's nor the Standard and Poor's ratings impact the Company's ability to borrow or affect the Company's interest rates for the senior secured term loans.

        A subsidiary of the Company has a credit agreement with Residential Funding Corporation (RFC) for the purpose of funding mortgage loans that will be resold. The credit agreement in 2001 initially provided for a revolving line of credit of $150.0 million, bore interest at the greater of one-month LIBOR or 3.0% (RFC Base Rate), plus 1.0%, and expired on August 31, 2001. Through various executed amendments and extension letters in 2001, the revolving line of credit was increased to $350.0 million and the maturity date was extended to January 22, 2002.

        Effective January 23, 2002, the Company entered into a Second Amended and Restated Warehousing Credit and Security Agreement. This agreement provided for a revolving line of credit in the amount of $350.0 million until February 28, 2002 and $150.0 million for the period from March 1, 2002 through August 31, 2002. Additionally, on February 1, 2002, the Company executed a Letter Agreement with RFC that redefined the RFC Base Rate to the greater of one-month LIBOR or 2.25% per annum. On April 20, 2002, the Company obtained a temporary revolving line of credit increase of $210.0 million that resulted in a total line of credit equaling $360.0 million, which expired on July 31, 2002. Upon expiration of the temporary increase and through various executed amendments and extension letter agreements, the Company established a revolving line of credit of $200.0 million, redefined the RFC Base Rate to the greater of one-month LIBOR or 2.0% and extended the maturity date of the agreement to December 20, 2002. On December 16, 2002, the Company entered into the Third Amended and Restated Warehousing Credit and Security Agreement effective December 20,

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2002. The agreement provides for a revolving line of credit of $200.0 million, bears interest at the RFC Base Rate plus 1.0% and expires on August 31, 2003.

        During the years ended December 31, 2002 and 2001, respectively, the Company had a maximum of $309.0 million and $164.0 million revolving line of credit principal outstanding with RFC. At December 31, 2002 and 2001, respectively, the Company had a $63.1 million and a $106.8 million warehouse line of credit outstanding, which are included in short-term borrowings in the accompanying consolidated balance sheets. Additionally, the Company had a $63.1 million and a $106.8 million warehouse receivable, which are also included in the accompanying consolidated balance sheets as of December 31, 2002 and 2001, respectively. Subsequent to December 31, 2002 and 2001, the warehouse lines of credit that were outstanding on those dates were repaid with the proceeds from the warehouse receivables.

        A subsidiary of the Company has a credit agreement with JP Morgan Chase. The credit agreement provides for a non-recourse revolving line of credit of up to $20.0 million, bears interest at 1.0% of the bank's cost of funds and expires on May 28, 2003. At December 31, 2002 and 2001, the Company had no revolving line of credit principal outstanding.

        During 2001, the Company incurred certain non-recourse debt through a joint venture. In September 2002, the maturity date on this non-recourse debt was extended to June 18, 2003. At December 31, 2002 and 2001, respectively, the Company had $40.0 million and $37.2 million of non-recourse debt outstanding, which is included in short-term borrowings in the accompanying consolidated balance sheets.

        The following is a summary of the Company's various contractual obligations (dollars in thousands):

 
  Payments Due by Period
Contractual Obligations

  Total
  Less than
1 year

  1-3 years
  4-5 years
  More than
5 years

Total debt (1)   $ 632,909   $ 121,776   $ 21,263   $ 16,863   $ 473,007
Operating leases (2)     487,311     66,632     109,286     78,014     233,379
Deferred compensation plan liability (3)(4)     106,252                 106,252
Pension liability (3)(4)     10,766                 10,766
   
 
 
 
 
Total Contractual Obligations   $ 1,237,238   $ 188,408   $ 130,549   $ 94,877   $ 823,404
   
 
 
 
 
 
  Amount of Commitments Expiration
Other Commitments

  Total
  Less than
1 year

  1-3 years
  4-5 years
  More than
5 years

Letters of credit (2)   $ 7,841   $ 6,795   $ 1,046   $   $
Guarantees (2)     1,046         1,046        
Co-investment commitments (2)     22,625     13,409     9,216        
   
 
 
 
 
Total Commitments   $ 31,512   $ 20,204   $ 11,308   $   $
   
 
 
 
 

(1)
Includes capital lease obligations. See Note 12 of the Notes to Consolidated Financial Statements.

(2)
See Note 13 of the Notes to Consolidated Financial Statements.

(3)
See Note 11 of the Notes to Consolidated Financial Statements.

(4)
An undeterminable portion of this amount will be paid in years one through five.

Acquisitions

        During 2001, the Company acquired a professional real estate services firm in Mexico for an aggregate purchase price of approximately $1.7 million in cash. The Company also purchased the remaining ownership interests that it did not already own in CB Richard Ellis/Hampshire, LLC for a purchase price of approximately $1.8 million in cash.

Litigation

        The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. Management believes that any liability that may result from disposition of these lawsuits will not have a material effect on the Company's consolidated financial position or results of operations.

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Net Operating Losses

        The Company had federal income tax net operating losses (NOLs) of approximately $7.9 million at December 31, 2001 and had no federal income tax NOLs at December 31, 2002.

Related Party Transactions

        The Company's investment management business involves investing the Company's own capital in certain real estate investments with clients, including its equity investments in CB Richard Ellis Strategic Partners, LP, Global Innovation Partners, LLC and other co-investments. The Company has provided investment management, property management, brokerage, appraisal and other professional services to these equity investees and earned revenues from these co-investments of $22.4 million, $15.4 million and $7.3 million during the years ended December 31, 2002, 2001 and 2000, respectively.

        Included in other current assets in the accompanying consolidated balance sheets is a note receivable from the Company's equity investment in Investor 1031, LLC in the amount of $1.2 million as of December 31, 2002. This note was issued on June 20, 2002, bears interest at 20.0% per annum and is due for repayment on July 15, 2003.

        Included in other current and long-term assets in the accompanying consolidated balance sheets are employee loans of $5.9 million and $1.6 million as of December 31, 2002 and 2001, respectively. The majority of these loans represent prepaid retention and recruitment awards issued to employees at varying principal amounts, bear interest at rates up to 10.0% per annum and mature on various dates through 2007. These loans and related interest are typically forgiven over time, assuming that the relevant employee is still employed by, and is in good standing with, the Company. As of December 31, 2002, the outstanding employee loan balances included a $0.3 million loan to Raymond Wirta, the Company's Chief Executive Officer, and a $0.2 million loan to Brett White, the Company's President. These non-interest bearing loans to Mr. Wirta and Mr. White were issued during 2002 and are due and payable on December 31, 2003.

        The accompanying consolidated balance sheets also include $4.8 million and $5.9 million of notes receivable from sale of stock as of December 31, 2002 and 2001, respectively. These notes are primarily composed of full-recourse loans to employees, officers and certain shareholders of the Company, which are secured by the Company's common stock that is owned by the borrowers. These full-recourse loans are at varying principal amounts, require quarterly interest payments, bear interest at rates up to 10.0% per annum and mature on various dates through 2010.

        Pursuant to the Company's 1996 Equity Incentive Plan (EIP), Mr. Wirta purchased 30,000 shares of CBRE common stock in 2000 at a purchase price of $12.875 per share that was paid for by delivery of a full recourse promissory note bearing interest at 7.40%. As part of the 2001 Merger, the 30,000 shares of CBRE common stock were exchanged for 30,000 shares of Class B common stock of the Company. These shares of Class B common stock were substituted for the CBRE shares as security for the promissory note. All interest charged on the outstanding promissory note balance for any year is forgiven if Mr. Wirta's performance produces a high enough level of bonus (approximately $7,500 of interest is forgiven for each $10,000 of bonus). As a result of bonuses paid in 2001 and in 2002, all interest on Mr. Wirta's promissory note for 2000 and 2001 was forgiven. As of December 31, 2002 and 2001, Mr. Wirta had an outstanding loan balance of $385,950, which is included in notes receivable from sale of common stock in the accompanying consolidated balance sheets.

        Pursuant to the Company's 1996 EIP, Mr. White purchased 25,000 shares of CBRE common stock in 1998 at a purchase price of $38.50 per share and 20,000 shares of CBRE common stock in 2000 at a purchase price of $12.875 per share. These purchases were paid for by delivery of full recourse promissory notes bearing interest at 7.40%. As part of the 2001 Merger, Mr. White's shares of CBRE common stock were exchanged for a like amount of shares of Class B common stock of the Company. These shares of Class B common stock were substituted for the CBRE shares as security for the notes.

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A First Amendment to Mr. White's 1998 promissory note provided that the portion of the then outstanding principal in excess of the fair market value of the shares would be forgiven in the event that Mr. White was an employee of the Company or its subsidiaries on November 16, 2002 and the fair market value of a share of the Company's common stock was less than $38.50 on November 16, 2002. Mr. White's 1998 promissory note was subsequently amended, terminating the First Amendment and adjusting the original 1998 Stock Purchase Agreement by reducing the purchase price from $38.50 to $16.00. During 2002, the 25,000 shares held as security for the Second Amended Promissory Note were tendered as full payment for the remaining balance of $400,000 on the 1998 promissory note. All interest charged on the outstanding promissory note balances for any year is forgiven if Mr. White's performance produces a high enough level of bonus (approximately $7,500 of interest is forgiven for each $10,000 of bonus). As a result of bonuses paid in 2001 and in 2002, all interest on Mr. White's promissory notes for 2000 and 2001 was forgiven. As of December 31, 2002 and 2001, respectively, Mr. White had outstanding loan balances of $257,300 and $657,300, which are included in notes receivable from sale of common stock in the accompanying consolidated balance sheets.

        As of December 31, 2002 and 2001, Mr. White had an outstanding loan of $164,832, which is included in notes receivable from sale of common stock in the accompanying consolidated balance sheets. This outstanding loan relates to the acquisition of 12,500 shares of CBRE's common stock prior to the 2001 Merger. Subsequent to the 2001 Merger, these shares were converted into shares in the Company's common stock and the related loan amount was carried forward. This loan bears interest at 6.0% and is payable at the earlier of: (i) October 14, 2003, (ii) the date of the sale of shares held by the Company pursuant to the related security agreement or (iii) the date of the termination of Mr. White's employment.

        At the time of the 2001 Merger, Mr. Wirta delivered to the Company an $80,000 promissory note, which bore interest at 10% per year, as payment for the purchase of 5,000 shares of the Company's Class B common stock. Mr. Wirta repaid this promissory note in full in April of 2002. Additionally, Mr. Wirta and Mr. White delivered full-recourse notes in the amounts of $512,504 and $209,734, respectively, as payment for a portion of the shares purchased in connection with the 2001 Merger. During 2002, Mr. Wirta paid down his loan amount by $40,004 and Mr. White paid off his note in its entirety. As of December 31, 2002, Mr. Wirta has an outstanding loan of $472,500, which is included in notes receivable from sale of common stock in the accompanying consolidated balance sheet.

        In the event that the Company's common stock is not freely tradable on a national securities exchange or an over-the-counter market by June 2004, the Company has agreed to loan Mr. Wirta up to $3.0 million on a full-recourse basis to enable him to exercise an existing option to acquire shares held by The Koll Holding Company, if Mr. Wirta is employed by the Company at the time of exercise, was terminated without cause or resigned for good reason. This loan will become repayable upon the earliest to occur of: (1) 90 days following termination of his employment, other than by the Company without cause or by him for good reason, (2) seven months following the date the Company's common stock becomes freely tradable as described above or (3) the receipt of proceeds from the sale of the pledged shares. This loan will bear interest at the prime rate in effect on the date of the loan, compounded annually, and will be repayable to the extent of any net proceeds received by Mr. Wirta upon the sale of any shares of the Company's common stock. Mr. Wirta will pledge the shares received upon exercise of the option as security for the loan.

Application of Critical Accounting Policies

        The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates under different assumptions or conditions. The Company

29


believes that the following critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of its consolidated financial statements:

Revenue Recognition

        The Company records real estate commissions on sales upon close of escrow or upon transfer of title. Real estate commissions on leases are generally recorded as income once the Company satisfies all obligations under the commission agreement. A typical commission agreement provides that the Company earns a portion of the lease commission upon the execution of the lease agreement by the tenant, while the remaining portion(s) of the lease commission is earned at a later date, usually upon tenant occupancy. The existence of any significant future contingencies will result in the delay of recognition of revenue until such contingencies are satisfied. For example, if the Company does not earn all or a portion of the lease commission until the tenant pays their first month's rent and the lease agreement provides the tenant with a free rent period, the Company delays revenue recognition until cash rent is paid by the tenant. Investment management and property management fees are recognized when earned under the provisions of the related agreements. Appraisal fees are recorded after services have been rendered. Loan origination fees are recognized at the time the loan closes and the Company has no significant remaining obligations for performance in connection with the transaction, while loan servicing fees are recorded to revenue as monthly principal and interest payments are collected from mortgagors. Other commissions, consulting fees and referral fees are recorded as income at the time the related services have been performed unless significant future contingencies exist.

        In establishing the appropriate provisions for trade receivables, the Company makes assumptions with respect to their future collectibility. The Company's assumptions are based on an individual assessment of a customer's credit quality as well as subjective factors and trends, including the aging of receivables balances. In addition to these individual assessments, in general, outstanding trade accounts receivable amounts that are greater than 180 days are fully provided for.

Principles of Consolidation

        The accompanying consolidated financial statements include the accounts of CBRE Holding, Inc. (the Company) and majority-owned and controlled subsidiaries. Additionally, the consolidated financial statements include the accounts of CBRE prior to the 2001 Merger as CBRE is considered the predecessor to the Company for purposes of Regulation S-X. The equity attributable to minority shareholders' interests in subsidiaries is shown separately in the accompanying consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated in consolidation.

        The Company's investments in unconsolidated subsidiaries in which it has the ability to exercise significant influence over operating and financial policies, but does not control, are accounted for under the equity method. Accordingly, the Company's share of the earnings of these equity-method basis companies is included in consolidated net income. All other investments held on a long-term basis are valued at cost less any impairment in value.

Goodwill and Other Intangible Assets

        Goodwill represents the excess of the purchase price paid by the Company over the fair value of the tangible and intangible assets and liabilities of CBRE at July 20, 2001, the date of the 2001 Merger. Other intangible assets include a trademark, which was separately identified as a result of the 2001 Merger, is not being amortized and has an indefinite estimated life. The remaining other intangible assets represent management contracts and loan servicing rights and are amortized on a straight-line basis over estimated useful lives ranging up to ten years.

        The Company fully adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. This statement requires the Company to perform at least an annual assessment of impairment of goodwill and other intangible assets deemed to have indefinite useful lives based on

30


assumptions and estimates of fair value and future cash flow information. In June 2002, the Company completed the first step of the transitional goodwill impairment test and determined that no impairment existed as of January 1, 2002. The Company also completed its required annual impairment test as of October 1, 2002 and determined that no impairment existed as of that date. An independent third-party valuation firm was engaged to perform all of the impairment tests.

New Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement applies to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of its fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of this statement is not expected to have any material impact on the Company's financial position or results of operations.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds the following pronouncements:

        SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions.

        The provisions of this statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this statement related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of this statement shall be effective for financial statements issued on or after May 15, 2002. Adoption of this statement has not had and is not expected to have any material effect on the Company's financial position or results of operations.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan and supersedes Emerging Issues Task Force Issue No. 94.3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company will account for such costs, if any, under SFAS No. 146 on a prospective basis.

        In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS No. 5, "Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures" and SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." This interpretation also rescinds FIN 34, "Disclosure of Indirect Guarantees of Indebtedness of Others." FIN 45 expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain

31


guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under certain guarantees. The disclosure requirements of FIN 45 are effective as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 has not had and is not expected to have a material impact on the Company's financial position or results of operations.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the effect on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends Accounting Principles Board (APB) Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition and the disclosure provisions are effective for fiscal years ending after December 15, 2002. The amendments to APB No. 28 are effective for interim periods beginning after December 15, 2002. The Company continues to account for stock-based compensation under the recognition and measurement principles of APB Opinion No. 25 and does not plan to voluntarily change to the fair value based method of accounting for stock-based compensation. The Company will adopt the interim disclosure provisions of SFAS No. 148 for the quarter ended March 31, 2003.

        In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities," which is an interpretation of Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements." This interpretation addresses consolidation of entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks. The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests and results of operations of a VIE need to be consolidated with its primary beneficiary. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the VIE's expected residual returns or if the VIE does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. For VIEs in which a significant (but not majority) variable interest is held, certain disclosures are required. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. The consolidation requirements apply to existing VIEs in the first fiscal year or interim period beginning after June 15, 2003. Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the VIE was established. The adoption of this interpretation is not expected to have a material impact on the Company's financial position or results of operations.

Forward-Looking Statements

        Portions of this Form 10-K, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which are generally identified by the use of terms such as "will," "expected" or similar expressions involving known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this Form 10-K. Any forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation

32


to update or revise any forward-looking statements found herein to reflect any changes in its expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: commercial real estate vacancy levels; employment conditions and their effect on vacancy rates; property values; rental rates; any general economic recession domestically or internationally; and general conditions of financial liquidity for real estate transactions.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        The Company's exposure to market risk consists of foreign currency exchange rate fluctuations related to international operations and changes in interest rates on debt obligations.

        Approximately 27% of the Company's business is transacted in local currencies of foreign countries. The Company attempts to manage its exposure primarily by balancing monetary assets and liabilities, and maintaining cash positions only at levels necessary for operating purposes. The Company routinely monitors its transaction exposure to currency exchange rate changes and occasionally enters into currency forward and option contracts to limit its exposure, as appropriate. As of December 31, 2002, the Company was not a party to any such contracts. The Company does not engage in any speculative activities in respect of foreign currency.

        The Company manages its interest expense by using a combination of fixed and variable rate debt. The Company's fixed and variable long-term debt at December 31, 2002 consisted of the following (dollars in thousands):

Year of Maturity

  Fixed
Rate

  One-Month
Yen LIBOR
+4.95%

  Greater of
3.0% or
One-Month
LIBOR +1.0%

  Three-Month
LIBOR
+3.25%

  Three-Month
LIBOR
+3.75%

  Interest Rate
Range of
4.37% to 6.50%

  Total
 
2003   $ 752   $ 40,005   $ 63,140   $ 8,125   $ 1,850   $ 7,904   $ 121,776  
2004     40             8,750     1,850         10,640  
2005     23             8,750     1,850         10,623  
2006     19             8,750     1,850         10,619  
2007     19             4,375     1,850         6,244  
Thereafter (1)     300,032                 172,975         473,007  
   
 
 
 
 
 
 
 
  Total   $ 300,885   $ 40,005   $ 63,140   $ 38,750   $ 182,225   $ 7,904   $ 632,909  
   
 
 
 
 
 
 
 
Weighted Average Interest Rate     12.1 %   5.0 %   3.0 %   4.7 %   5.2 %   4.9 %   8.2 %
   
 
 
 
 
 
 
 

(1)
Primarily includes the 111/4% Senior Subordinated Notes, the 16% Senior Notes and the Tranche B term loans under the senior secured credit facilities.

        The Company utilizes sensitivity analyses to assess the potential effect of its variable rate debt. If interest rates were to increase by 47 basis points, approximately 10% of the weighted average variable rate at year end, the net impact would be a decrease of $1.6 million on annual pre-tax income and cash provided by operating activities for the twelve months ended December 31, 2002.

        Based on dealers' quotes, the estimated fair value of the Company's $225.9 million 111/4% Senior Subordinated Notes is $208.4 million at December 31, 2002. There was no trading activity for the 16% Senior Notes, which are due in 2011. Their carrying value as of December 31, 2002 totaled $61.9 million. Estimated fair values for the term loans under the senior secured credit facilities and the remaining long-term debt are not presented because the Company believes that they are not materially different from book value, primarily because the majority of the remaining debt is based on variable rates that approximate terms that could be obtained at December 31, 2002.

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

 
  Page
Independent Auditors' Report   35

Report of Independent Public Accountants

 

37

Consolidated Balance Sheets at December 31, 2002 and 2001

 

38

Consolidated Statements of Operations for the twelve months ended December 31, 2002, for the period from February 20, 2001 (inception) through December 31, 2001, for the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000

 

39

Consolidated Statements of Cash Flows for the twelve months ended December 31, 2002, for the period from February 20, 2001 (inception) through December 31, 2001, for the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000

 

40

Consolidated Statements of Stockholders' Equity for the twelve months ended December 31, 2002, for the period from February 20, 2001 (inception) through December 31, 2001, for the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000

 

41

Consolidated Statements of Comprehensive (Loss) Income for the twelve months ended December 31, 2002, for the period from February 20, 2001 (inception) through December 31, 2001, for the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000

 

43

Notes to Consolidated Financial Statements

 

44

Quarterly Results of Operations (Unaudited)

 

90

FINANCIAL STATEMENT SCHEDULE:

 

 

Schedule II—Valuation and Qualifying Accounts

 

91

All other schedules are omitted because they are either not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto.

34



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of CBRE Holding, Inc.:

        We have audited the accompanying consolidated balance sheet of CBRE Holding, Inc., a Delaware corporation, and subsidiaries (the "Company") as of December 31, 2002 and the related consolidated statements of operations, cash flows, stockholders' equity and comprehensive income (loss) for the twelve months then ended. Our audit also included the 2002 financial statement schedule listed in the Index to Consolidated Financial Statements and Financial Statement Schedule at Item 8. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the 2002 financial statements and the financial statement schedule based on our audit. The consolidated financial statements and the financial statement schedule of the Company as of December 31, 2001 and for the period from February 20, 2001 (inception) through December 31, 2001 and the consolidated financial statements and financial statement schedules of CB Richard Ellis Services, Inc. (the "Predecessor") for the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and stated that such 2001 and 2000 financial statement schedules, when considered in relation to the 2001 and 2000 basic financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein, in their report dated february 26, 2002.

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

        In our opinion, such 2002 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and the results of their operations and their cash flows for the twelve months then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2002 financial statement schedule, when considered in relation to the basic consolidated financial statements, presents fairly in all material respects the information set forth therein.

        As discussed in Note 8 to the Consolidated Financial Statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002 to conform to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142").

        As discussed above, the consolidated financial statements of the Company as of December 31, 2001 and for the period from February 20, 2001 (inception) through December 31, 2001 and the financial statements of the Predecessor for the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000 were audited by other auditors who have ceased operations. As described in Note 8, these consolidated financial statements have been revised to include the transitional disclosures required by SFAS 142, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 8 with respect to 2001 and 2000 included (i) comparing the previously reported net income (loss) to the previously issued consolidated financial statements and the adjustments to reported net income (loss) representing amortization expense (including any related tax effects) recognized in those periods relating to goodwill that is no longer being amortized as a result of applying SFAS 142 to the Company's and the

35



Predecessor's underlying analysis obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of adjusted net income (loss) to reported net income (loss) and the related earnings (loss)-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 8 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of the Company and the Predecessor other than with respect to such disclosures, and accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole.

DELOITTE & TOUCHE LLP

Los Angeles, California
March 21, 2003

36



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of CBRE Holding, Inc.:

        We have audited the accompanying consolidated balance sheet of CBRE Holding, Inc., a Delaware corporation, (the Company) as of December 31, 2001 and related consolidated statements of operations, cash flows, stockholders' equity and comprehensive income for the period from February 20, 2001 (inception) through December 31, 2001. We have also audited the accompanying consolidated balance sheet of CB Richard Ellis Services, Inc. (Predecessor) as of December 31, 2000, and the related consolidated statements of operations, cash flows, stockholders' equity and comprehensive (loss) income for the period from January 1, 2001 to July 20, 2001, and the twelve months ended December 31, 2000 and 1999. These financial statements and the schedule referred to below are the responsibility of the Company's and the Predecessor's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CBRE Holding, Inc. as of December 31, 2001 and the results of their operations and their cash flows for the period from February 20, 2001 (inception) through December 31, 2001 and the financial position of CB Richard Ellis Services, Inc. (the Predecessor) as of December, 31 2000 and the results of their operations and their cash flows for the period from January 1, 2001 to July 20, 2001, and the twelve months ended December 31, 2000 and 1999, in conformity with accounting principles generally accepted in the United States.

        Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Los Angeles, California
February 26, 2002

        NOTE:    The report of Arthur Andersen LLP presented above is a copy of a previously issued Arthur Andersen LLP report. This report has not been reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided a consent to the inclusion of its report in this Form 10-K.

        NOTE:    The consolidated financial statements as of December 31, 2000 and for the period from February 20, 2001 (inception) through December 31, 2001, the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000 have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (see Note 8). The report of Arthur Andersen LLP presented above does not extend to these changes.

37




CBRE HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

 
  December 31
 
 
  2002
  2001
 
ASSETS              
Current Assets:              
  Cash and cash equivalents   $ 79,701   $ 57,450  
  Receivables, less allowance for doubtful accounts of $10,892 and $11,748 at December 31, 2002 and 2001, respectively     166,213     156,434  
  Warehouse receivable     63,140     106,790  
  Prepaid expenses     9,748     8,325  
  Deferred tax assets, net     18,723     32,155  
  Other current assets     8,415     8,493  
   
 
 
    Total current assets     345,940     369,647  
Property and equipment, net     66,634     68,451  
Goodwill     577,137     609,543  
Other intangible assets, net of accumulated amortization of $7,739 and $3,153 at December 31, 2002 and 2001, respectively     91,082     38,117  
Cash surrender value of insurance policies, deferred compensation plan     63,642     69,385  
Investments in and advances to unconsolidated subsidiaries     50,208     42,535  
Deferred tax assets, net     36,376     54,002  
Other assets     93,857     102,832  
   
 
 
    Total assets   $ 1,324,876   $ 1,354,512  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current Liabilities:              
  Accounts payable and accrued expenses   $ 102,415   $ 82,982  
  Compensation and employee benefits payable     63,734     68,118  
  Accrued bonus and profit sharing     103,858     85,188  
  Income taxes payable     15,451     21,736  
  Short-term borrowings:              
    Warehouse line of credit     63,140     106,790  
    Other     47,925     48,828  
   
 
 
    Total short-term borrowings     111,065     155,618  
  Current maturities of long-term debt     10,711     10,223  
   
 
 
    Total current liabilities     407,234     423,865  
Long-Term Debt:              
  111/4% senior subordinated notes, net of unamortized discount of $3,057 and $3,263 at December 31, 2002 and 2001, respectively     225,943     225,737  
  Senior secured term loans     211,000     220,975  
  16% senior notes, net of unamortized discount of $5,107 and $5,344 at December 31, 2002 and 2001, respectively     61,863     59,656  
  Other long-term debt     12,327     15,695  
   
 
 
    Total long-term debt     511,133     522,063  
Deferred compensation liability     106,252     105,104  
Other liabilities     43,301     46,661  
   
 
 
    Total liabilities     1,067,920     1,097,693  
Minority interest     5,615     4,296  
Commitments and contingencies              
Stockholders' Equity:              
  Class A common stock; $0.01 par value; 75,000,000 shares authorized; 1,793,254 and 1,755,601 shares issued and outstanding (including treasury shares) at December 31, 2002 and 2001, respectively     17     17  
  Class B common stock; $0.01 par value; 25,000,000 shares authorized; 12,624,813 shares issued and outstanding at December 31, 2002 and 2001     127     127  
  Additional paid-in capital     240,574     240,541  
  Notes receivable from sale of stock     (4,800 )   (5,884 )
  Accumulated earnings     36,153     17,426  
  Accumulated other comprehensive (loss) income     (18,998 )   296  
  Treasury stock at cost, 110,174 shares at December 31, 2002     (1,732 )    
   
 
 
    Total stockholders' equity     251,341     252,523  
   
 
 
    Total liabilities and stockholders' equity   $ 1,324,876   $ 1,354,512  
   
 
 

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

38



CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)

 
  Company
  Company
  Predecessor
  Predecessor
 
 
  CBRE Holding,
Inc.

  CBRE Holding,
Inc.

  CB Richard Ellis Services, Inc.
  CB Richard Ellis Services, Inc.
 
 
  Twelve Months Ended December 31, 2002
  February 20, 2001 (inception) through December 31, 2001
  Period from January 1, 2001 through July 20, 2001
  Twelve Months Ended December 31, 2000
 
Revenue   $ 1,170,277   $ 562,828   $ 607,934   $ 1,323,604  
Costs and expenses:                          
  Commissions, fees and other incentives     554,942     266,764     280,813     628,097  
  Operating, administrative and other     493,949     216,246     296,386     551,528  
  Depreciation and amortization     24,614     12,198     25,656     43,199  
  Equity income from unconsolidated subsidiaries     (9,326 )   (1,554 )   (2,874 )   (6,505 )
  Merger-related and other nonrecurring charges     36     6,442     22,127      
   
 
 
 
 
Operating income (loss)     106,062     62,732     (14,174 )   107,285  
Interest income     3,272     2,427     1,567     2,554  
Interest expense     60,501     29,717     20,303     41,700  
   
 
 
 
 
Income (loss) before provision for income taxes     48,833     35,442     (32,910 )   68,139  
Provision for income taxes     30,106     18,016     1,110     34,751  
   
 
 
 
 
Net income (loss)   $ 18,727   $ 17,426   $ (34,020 ) $ 33,388  
   
 
 
 
 
Basic earnings (loss) per share   $ 1.25   $ 2.22   $ (1.60 ) $ 1.60  
   
 
 
 
 
Weighted average shares outstanding for basic earnings (loss) per share     15,025,308     7,845,004     21,306,584     20,931,111  
   
 
 
 
 
Diluted earnings (loss) per share   $ 1.23   $ 2.20   $ (1.60 ) $ 1.58  
   
 
 
 
 
Weighted average shares outstanding for diluted earnings (loss) per share     15,222,111     7,909,797     21,306,584     21,097,240  
   
 
 
 
 

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

39



CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

 
  Company
  Company
  Predecessor
  Predecessor
 
 
  CBRE Holding, Inc.
  CBRE Holding, Inc.
  CB Richard Ellis
Services, Inc.

  CB Richard Ellis
Services, Inc.

 
 
  Twelve Months Ended December 31, 2002
  February 20, 2001 (inception) through December 31, 2001
  Period from January 1, 2001 through July 20, 2001
  Twelve Months Ended December 31, 2000
 
CASH FLOWS FROM OPERATING ACTIVITIES:                          
Net income (loss)   $ 18,727   $ 17,426   $ (34,020 ) $ 33,388  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                          
  Depreciation and amortization     24,614     12,198     25,656     43,199  
  Amortization of deferred financing costs     3,322     1,316     1,152     2,069  
  Deferred compensation deferrals     15,925     16,151     16,447     43,557  
  Gain on sale of properties, businesses and servicing rights     (6,287 )   (2,868 )   (10,009 )   (10,184 )
  Equity income from unconsolidated subsidiaries     (9,326 )   (1,554 )   (2,874 )   (6,505 )
  Provision for litigation, doubtful accounts and other     7,649     2,714     3,872     5,125  
  Deferred income tax provision (benefit)     5,158     (1,948 )   (1,569 )   (4,083 )
(Increase) decrease in receivables     (4,770 )   (18,379 )   26,970     (12,545 )
Decrease (increase) in cash surrender value of insurance policies, deferred compensation plan     5,743     (4,517 )   (11,665 )   (32,761 )
Increase (decrease) in accounts payable and accrued expenses     3,678     (5,835 )   (5,491 )   (3,201 )
Increase (decrease) in compensation and employee benefits payable and accrued bonus and profit sharing     17,541     64,677     (101,312 )   24,418  
Increase (decrease) in income taxes payable     3,225     13,578     (16,357 )   11,074  
Decrease in other liabilities     (15,203 )   (9,260 )   (11,305 )   (12,806 )
Other operating activities, net     (5,114 )   7,635     275     114  
   
 
 
 
 
  Net cash provided by (used in) operating activities     64,882     91,334     (120,230 )   80,859  
CASH FLOWS FROM INVESTING ACTIVITIES:                          
Capital expenditures, net of concessions received     (14,266 )   (6,501 )   (14,814 )   (23,668 )
Proceeds from sale of properties, businesses and servicing rights     6,378     2,108     9,544     17,495  
Purchases of investments     (1,012 )   (1,081 )   (3,202 )   (23,413 )
Investment in property held for sale         (40,174 )   (2,282 )    
Acquisition of businesses including net assets acquired, intangibles and goodwill     (14,811 )   (214,702 )   (1,924 )   (6,561 )
Other investing activities, net     (419 )   (1,043 )   539     3,678  
   
 
 
 
 
  Net cash used in investing activities     (24,130 )   (261,393 )   (12,139 )   (32,469 )
CASH FLOWS FROM FINANCING ACTIVITIES:                          
Proceeds from revolver and swingline credit facility     238,000     113,750          
Repayment of revolver and swingline credit facility     (238,000 )   (113,750 )        
(Repayment of) proceeds from senior notes and other loans, net     (8,205 )   (1,188 )   446     588  
Proceeds from senior secured term loans         235,000          
Repayment of senior secured term loans     (9,351 )   (4,675 )        
Proceeds from non-recourse debt related to property held for sale         37,179          
Repayment of 87/8% senior subordinated notes         (175,000 )        
Proceeds from 111/4% senior subordinated notes         225,629          
Proceeds from 16% senior notes         65,000          
Proceeds from revolving credit facility             195,000     179,000  
Repayment of revolving credit facility         (235,000 )   (70,000 )   (229,000 )
Payment of deferred financing fees     (443 )   (21,750 )   (8 )   (120 )
Proceeds from issuance of common stock     180     92,156          
Other financing activities, net     (19 )   (3,520 )   792     (3,991 )
   
 
 
 
 
Net cash (used in) provided by financing activities     (17,838 )   213,831     126,230     (53,523 )
   
 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     22,914     43,772     (6,139 )   (5,133 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     57,450     13,662     20,854     27,844  
  Effect of currency exchange rate changes on cash     (663 )   16     (1,053 )   (1,857 )
   
 
 
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 79,701   $ 57,540   $ 13,662   $ 20,854  
   
 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                          
  Cash paid during the period for                          
    Interest (net of amount capitalized)   $ 52,647   $ 26,126   $ 18,457   $ 38,352  
   
 
 
 
 
    Income taxes, net of refunds   $ 19,142   $ 5,061   $ 19,083   $ 27,607  
   
 
 
 
 
  Non-cash investing and financing activities                          
    Fair value of assets acquired   $   $ (492,220 ) $ (105 ) $ (2,287 )
    Fair value of liabilities acquired         719,829         41  
    Issuance of stock         148,641          
    Goodwill     (14,811 )   (590,952 )   (1,819 )   (4,315 )
   
 
 
 
 
    Net cash paid for acquisitions   $ (14,811 ) $ (214,702 ) $ (1,924 ) $ (6,561 )
   
 
 
 
 

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

40



CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)

 
  Company
 
 
  CBRE Holding, Inc.
 
 
   
   
   
   
   
  Accumulated other comprehensive income (loss)
   
   
 
 
  Class A common stock
  Class B common stock
  Additional paid-in capital
  Notes receivable from sale of stock
  Accumulated earnings
  Minimum pension liability
  Foreign currency translation
  Treasury stock
  Total
 
Balance, February 20, 2001   $   $   $   $   $   $   $   $   $  
Net income                     17,426                 17,426  
Contribution of deferred compensation plan stock fund units             18,771                         18,771  
Contribution of shares by certain shareholders of CB Richard Ellis Services, Inc         80     121,732                         121,812  
Net issuance of Class A common stock     17         27,672                         27,689  
Issuance of Class B common stock         47     72,366                         72,413  
Notes receivable from sale of stock                 (5,884 )                   (5,884 )
Foreign currency translation gain                             296         296  
   
 
 
 
 
 
 
 
 
 
Balance, December 31, 2001     17     127     240,541     (5,884 )   17,426         296         252,523  
Net income                     18,727                 18,727  
Issuance of Class A common stock             460     (180 )                   280  
Net cancellation of deferred compensation stock fund units             (427 )                       (427 )
Net collection on notes receivable from sale of stock                 1,264                     1,264  
Purchase of common stock                                 (1,732 )   (1,732 )
Minimum pension liability adjustment, net of tax                         (17,039 )           (17,039 )
Foreign currency translation loss                             (2,255 )       (2,255 )
   
 
 
 
 
 
 
 
 
 
Balance, December 31, 2002   $ 17   $ 127   $ 240,574   $ (4,800 ) $ 36,153   $ (17,039 ) $ (1,959 ) $ (1,732 ) $ 251,341  
   
 
 
 
 
 
 
 
 
 

41


 
  Predecessor
 
 
  CB Richard Ellis Services, Inc.
 
 
  Common stock
  Additional paid-in capital
  Notes receivable from sale of stock
  Accumulated (deficit) earnings
  Accumulated other comprehensive loss
  Treasury stock
  Total
 
Balance, December 31, 1999   $ 213   $ 355,893   $ (8,087 ) $ (122,485 ) $ (1,928 ) $ (13,869 ) $ 209,737  
Net income                 33,388             33,388  
Common stock issued for incentive plans     4     4,310     (4,310 )               4  
Contributions, deferred compensation plan         2,729                     2,729  
Deferred compensation plan co-match         907                     907  
Net collection on notes receivable from sale of stock         (550 )   550                  
Amortization of cheap and restricted stock         342                       342  
Tax deduction from issuance of stock         580                     580  
Foreign currency translation loss                     (10,330 )       (10,330 )
Purchase of common stock         (43 )               (1,975 )   (2,018 )
   
 
 
 
 
 
 
 
Balance, December 31, 2000     217     364,168     (11,847 )   (89,097 )   (12,258 )   (15,844 )   235,339  
Net loss                 (34,020 )           (34,020 )
Common stock issued for incentive plans         360                     360  
Contributions, deferred compensation plan         1,004                     1,004  
Deferred compensation plan co-match         492                     492  
Net collection on notes receivable from sale of stock         (742 )   1,001                 259  
Amortization of cheap and restricted stock     1     210                     211  
Tax deduction from issuance of stock         1,479                     1,479  
Foreign currency translation loss                     (7,106 )       (7,106 )
Cancellation of common stock         (54 )                   (54 )
Cancellation of common stock and elimination of historical equity due to the merger     (218 )   (366,917 )   10,846     123,117     19,364     15,844     (197,964 )
   
 
 
 
 
 
 
 
Balance, July 20, 2001   $   $   $   $   $   $   $  
   
 
 
 
 
 
 
 

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

42



CBRE HOLDING, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands)

 
  Company
  Company
  Predecessor
  Predecessor
 
 
  CBRE
Holding, Inc.

  CBRE
Holding, Inc.

  CB Richard Ellis
Services, Inc.

  CB Richard Ellis
Services, Inc.

 
 
  Twelve Months
Ended
December 31,
2002

  February 20,
2001 (inception)
through
December 31,
2001

  Period from
January 1, 2001
through
July 20, 2001

  Twelve Months
Ended
December 31,
2000

 
Net income (loss)   $ 18,727   $ 17,426   $ (34,020 ) $ 33,388  

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Foreign currency translation (loss) gain     (2,255 )   296     (7,106 )   (10,330 )
  Minimum pension liability adjustment, net of tax     (17,039 )            
   
 
 
 
 
  Total other comprehensive (loss) income     (19,294 )   296     (7,106 )   (10,330 )
   
 
 
 
 
Comprehensive (loss) income   $ (567 ) $ 17,722   $ (41,126 ) $ 23,058  
   
 
 
 
 

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

43



CBRE HOLDING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Nature of Operations

        CBRE Holding, Inc., a Delaware corporation, was incorporated on February 20, 2001 as Blum CB Holding Corporation. On March 26, 2001, Blum CB Holding Corporation changed its name to CBRE Holding, Inc. (the Company). The Company and its former wholly owned subsidiary, Blum CB Corporation (Blum CB), a Delaware corporation, were created to acquire all of the outstanding shares of CB Richard Ellis Services, Inc. (CBRE), an international real estate services firm. Prior to July 20, 2001, the Company was a wholly owned subsidiary of RCBA Strategic Partners, LP (RCBA Strategic), which is an affiliate of Richard C. Blum, a director of the Company and CBRE.

        On July 20, 2001, the Company acquired CBRE (the 2001 Merger) pursuant to an Amended and Restated Agreement and Plan of Merger, dated May 31, 2001, among the Company, CBRE and Blum CB. Blum CB was merged with and into CBRE, with CBRE being the surviving corporation. The operations of the Company after the 2001 Merger are substantially the same as the operations of CBRE prior to the 2001 Merger. In addition, the Company has no substantive operations other than its investment in CBRE.

        CBRE Holding, Inc. is a holding company that conducts its operations primarily through direct and indirect operating subsidiaries. In the United States (US), the Company operates through CB Richard Ellis, Inc. and L.J. Melody, in the United Kingdom (UK) through CB Hillier Parker and in Canada through CB Richard Ellis Limited. CB Richard Ellis Investors, LLC (CBRE Investors) and its foreign affiliates conduct business in the US, Europe and Asia. The Company operates in 47 countries through various subsidiaries and pursuant to cooperation agreements. Approximately 73% of the Company's revenue is generated from the US and 27% is generated from the rest of the world.

2.    Significant Accounting Policies

        The accompanying consolidated financial statements include the accounts of the Company and majority-owned and controlled subsidiaries. Additionally, the consolidated financial statements include the accounts of CBRE prior to the 2001 Merger as CBRE is considered the predecessor to the Company for purposes of Regulation S-X. The equity attributable to minority shareholders' interests in subsidiaries is shown separately in the accompanying consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated in consolidation.

        The Company's investments in unconsolidated subsidiaries in which it has the ability to exercise significant influence over operating and financial policies, but does not control, are accounted for under the equity method. Accordingly, the Company's share of the earnings of these equity-method basis companies is included in consolidated net income. All other investments held on a long-term basis are valued at cost less any impairment in value.

        The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results may differ from these estimates. Management believes that these estimates provide a reasonable basis for the fair presentation of its financial condition and results of operations.

44


        Cash and cash equivalents generally consist of cash and highly liquid investments with an original maturity of less than three months. The Company controls certain cash and cash equivalents as an agent for its investment and property management clients. These amounts are not included in the consolidated balance sheets (See Note 17).

        Property and equipment is stated at cost, net of accumulated depreciation, or in the case of capitalized leases, at the present value of the future minimum lease payments. Depreciation and amortization of property and equipment is computed primarily using the straight-line method over estimated useful lives ranging up to ten years. Leasehold improvements are amortized over the term of the respective leases, excluding options to renew. The Company capitalizes expenditures that materially increase the life of the related assets and expenses the cost of maintenance and repairs.

        The Company periodically reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If any of the significant assumptions inherent in this assessment materially change due to market, economic, and/or other factors, the recoverability is assessed based on the revised assumptions. If this analysis indicates that such assets are considered to be impaired, the impairment is recognized in the period the changes occur and represents the amount by which the carrying value exceeds the fair value of the asset.

        Goodwill represents the excess of the purchase price paid by the Company over the fair value of the tangible and intangible assets and liabilities of CBRE at July 20, 2001, the date of the 2001 Merger. Other intangible assets include a trademark, which was separately identified as a result of the 2001 Merger, is not being amortized and has an indefinite estimated life. The remaining other intangible assets represent management contracts and loan servicing rights and are amortized on a straight-line basis over estimated useful lives ranging up to ten years.

        The Company fully adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. This statement requires the Company to perform at least an annual assessment of impairment of goodwill and other intangible assets deemed to have indefinite useful lives based on assumptions and estimates of fair value and future cash flow information. In June 2002, the Company completed the first step of the transitional goodwill impairment test and determined that no impairment existed as of January 1, 2002. The Company also completed its required annual impairment test as of October 1, 2002 and determined that no impairment existed as of that date. An independent third-party valuation firm was engaged to perform all of the impairment tests (See Note 8).

        Costs incurred in connection with financing activities are deferred and amortized using the straight-line method over the terms of the related debt agreements ranging up to 10 years. Amortization of these costs is charged to interest expense in the accompanying consolidated statements of operations. Total deferred costs, net of accumulated amortization, included in other assets in the accompanying consolidated balance sheets were $20.5 million and $23.3 million, as of December 31, 2002 and 2001, respectively.

45


        Real estate commissions on sales are recorded as income upon close of escrow or upon transfer of title. Real estate commissions on leases are generally recorded as income once the Company satisfies all obligations under the commission agreement. A typical commission agreement provides that the Company earns a portion of the lease commission upon the execution of the lease agreement by the tenant, while the remaining portion(s) of the lease commission is earned at a later date, usually upon tenant occupancy. The existence of any significant future contingencies will result in the delay of recognition of revenue until such contingencies are satisfied. For example, if the Company does not earn all or a portion of the lease commission until the tenant pays their first month's rent and the lease agreement provides the tenant with a free rent period, the Company delays revenue recognition until cash rent is paid by the tenant. Investment management and property management fees are recognized when earned under the provisions of the related agreements. Appraisal fees are recorded after services have been rendered. Loan origination fees are recognized at the time the loan closes and the Company has no significant remaining obligations for performance in connection with the transaction, while loan servicing fees are recorded to revenue as monthly principal and interest payments are collected from mortgagors. Other commissions, consulting fees and referral fees are recorded as income at the time the related services have been performed unless significant future contingencies exist.

        In establishing the appropriate provisions for trade receivables, the Company makes assumptions with respect to their future collectibility. The Company's assumptions are based on an individual assessment of a customer's credit quality as well as subjective factors and trends, including the aging of receivables balances. In addition to these individual assessments, in general, outstanding trade accounts receivable amounts that are greater than 180 days are fully provided for.

        The costs of business promotion and advertising are expensed as incurred in accordance with Statement of Position 93-7, "Reporting on Advertising Costs." Business promotion and advertising costs of $42.4 million, $17.0 million, $30.4 million and $57.0 million were included in operating, administrative and other expenses for the twelve months ended December 31, 2002, the period from February 20, 2001 (inception) through December 31, 2001, the period from January 1, 2001 through July 20, 2001 and the twelve months ended December 31, 2000.

        The financial statements of subsidiaries located outside the US are generally measured using the local currency as the functional currency. The assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date and income and expenses are translated at the average monthly rate. The resulting translation adjustments are included in the accumulated other comprehensive (loss) income component of stockholders' equity. Gains and losses resulting from foreign currency transactions are included in the results of operations. The aggregate transaction gains and losses included in the accompanying consolidated statements of operations are a $6.4 million gain, a $0.2 million loss, a $0.3 million gain, and a $3.1 million loss for the twelve months ended December 31, 2002, the period February 20, 2001 (inception) through December 31, 2001, the period from January 1, 2001 through July 20, 2001 and the twelve months ended December 31, 2000, respectively.

46


        Comprehensive (loss) income consists of net income (loss) and other comprehensive (loss) income. Accumulated other comprehensive (loss) income consists of foreign currency translation adjustments and a minimum pension liability adjustment. Foreign currency translation adjustments exclude income tax expense (benefit) given that earnings of non-US subsidiaries are deemed to be reinvested for an indefinite period of time. The income tax benefit associated with the minimum pension liability adjustment is $7.3 million for the twelve months ended December 31, 2002.

        The Company follows SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" in accounting for loan sales and acquisition of servicing rights. SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under the approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred at fair value. Servicing assets are amortized over the period of estimated servicing income with write-off required when control is surrendered. The Company's recording of servicing rights at their fair value resulted in gains, which have been reflected in the accompanying consolidated statements of operations. Corresponding servicing assets of approximately $2.1 million and $1.8 million, at December 31, 2002 and 2001, respectively, are included in other intangible assets reflected in the accompanying consolidated balance sheets.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the effect on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition and the disclosure provisions are effective for fiscal years ending after December 15, 2002. The amendments to APB No. 28 are effective for interim periods beginning after December 15, 2002. The Company will adopt the interim disclosure provisions of SFAS No. 148 for the quarter ended March 31, 2003.

        However, the Company continues to account for stock-based compensation under the recognition and measurement principles of APB Opinion No. 25 and does not plan to voluntarily change to the fair value based method of accounting for stock-based compensation. Under this method, the Company does not recognize compensation expense for options that were granted at or above the market price of the underlying stock on the date of grant. Had compensation expense been determined consistent with

47



SFAS No. 123, the Company's net income (loss) and per share information would have been reduced to the following pro forma amounts (dollars in thousands, except per share data):

 
  Company
  Company
  Predecessor
  Predecessor
 
  CBRE
Holding, Inc.

  CBRE
Holding, Inc.

  CB Richard Ellis
Services, Inc.

  CB Richard Ellis
Services, Inc.

 
  Twelve Months
Ended
December 31,
2002

  February 20,
2001 (inception)
through
December 31,
2001

  Period from
January 1, 2001
through
July 20, 2001

  Twelve Months
Ended
December 31,
2000

Net Income (Loss):                        
  As Reported   $ 18,727   $ 17,426   $ (34,020 ) $ 33,388
  Pro Forma     18,204     17,154     (36,778 )   30,393
Basic EPS:                        
  As Reported     1.25     2.22     (1.60 )   1.60
  Pro Forma     1.21     2.19     (1.73 )   1.45
Diluted EPS:                        
  As Reported     1.23     2.20     (1.60 )   1.58
  Pro Forma     1.20     2.17     (1.73 )   1.44

        These pro forma amounts may not be representative of future pro forma results.

        The weighted average fair value of options and warrants granted was $2.33 for the twelve months ended December 31, 2002, $1.86 for the period from February 20, 2001 (inception) through December 31, 2001 and $6.72 for the twelve months ended December 31, 2000. There were no stock options or warrants granted by CBRE for the period from January 1, 2001 through July 20, 2001. Dividend yield is excluded from the calculation since it is the present intention of the Company to retain all earnings. The fair value of each option grant and warrant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:

 
  Company
  Company
  Predecessor
 
 
  CBRE
Holding, Inc.

  CBRE
Holding, Inc.

  CB Richard Ellis
Services, Inc.

 
 
  Twelve Months
Ended
December 31,
2002

  February 20,
2001 (inception)
through
December 31,
2001

  Twelve Months
Ended
December 31,
2000

 
Risk-free interest rate   4.06 % 4.69 % 6.52 %
Expected volatility   0.00 % 0.00 % 58.06 %
Expected life   5 years   5 years   5 years  

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the Company believes the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its employee stock options.

48



        Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during each period. The computation of diluted earnings (loss) per share further assumes the dilutive effect of stock options, stock warrants, contingently issuable shares and other stock-based compensation programs. Contingently issuable shares represent unvested stock fund units in the deferred compensation plan. In accordance with SFAS No. 128, "Earnings Per Share" these shares are included in the dilutive earnings per share calculation under the treasury stock method (see Note 15).

        Income taxes are accounted for under the asset and liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax basis of assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured by applying enacted tax rates and laws to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

        In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement applies to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of its fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of this statement is not expected to have any material impact on the Company's financial position or results of operations.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds the following pronouncements:

        SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions.

        The provisions of this statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this statement related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of this statement shall be

49



effective for financial statements issued on or after May 15, 2002. Adoption of this statement has not had and is not expected to have any material effect on the Company's financial position or results of operations.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan and supersedes Emerging Issues Task Force Issue No. 94.3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 is to be applied prospectively to exit or disposal plan activities initiated after December 31, 2002. The Company will account for such costs, if any, under SFAS No. 146 on a prospective basis.

        In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS No. 5, "Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures" and SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." This interpretation also rescinds FIN 34, "Disclosure of Indirect Guarantees of Indebtedness of Others." FIN 45 expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under certain guarantees. The disclosure requirements of FIN 45 are effective as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 has not had and is not expected to have a material impact on the Company's financial position or results of operations.

        In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities," which is an interpretation of Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements." This interpretation addresses consolidation of entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks. The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests and results of operations of a VIE need to be consolidated with its primary beneficiary. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the VIE's expected residual returns, or if the VIE does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. For VIEs in which a significant (but not majority) variable interest is held, certain disclosures are required. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. The consolidation requirements apply to existing VIEs in the first fiscal year or interim period beginning after June 15, 2003. Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the VIE was established. The adoption of this interpretation is not expected to have a material impact on the Company's financial position or results of operations.

        Certain reclassifications, which do not have an effect on net income, have been made to the 2001 and 2000 financial statements to conform to the 2002 presentation.

50


3.    2001 Merger

        On July 20, 2001, the Company acquired CBRE (the 2001 Merger) pursuant to an Amended and Restated Agreement and Plan of Merger dated May 31, 2001 (the 2001 Merger Agreement) among the Company, CBRE and Blum CB. Blum CB was merged with and into CBRE, with CBRE being the surviving corporation. The operations of the Company after the 2001 Merger are substantially the same as the operations of CBRE prior to the 2001 Merger. In addition, the Company has no substantive operations other than its investment in CBRE. As such, CBRE is considered the predecessor to the Company for purposes of Regulation S-X.

        At the effective time of the 2001 Merger, CBRE became a wholly owned subsidiary of the Company. Pursuant to the terms of the 2001 Merger Agreement, each issued and outstanding share of common stock of CBRE was converted into the right to receive $16.00 in cash, except for: (i) shares of common stock of CBRE owned by the Company and Blum CB immediately prior to the 2001 Merger, totaling 7,967,774 shares, which were cancelled, (ii) treasury shares and shares of common stock of CBRE owned by any of its subsidiaries, which were cancelled and (iii) shares of CBRE held by stockholders who perfected appraisal rights for such shares in accordance with Delaware law. All shares of common stock of CBRE outstanding prior to the 2001 Merger were acquired by the Company and subsequently cancelled. Immediately prior to the 2001 Merger, the following, collectively referred to as the buying group, contributed to the Company all the shares of CBRE's common stock that he or it directly owned in exchange for an equal number of shares of Class B common stock of the Company: Blum Strategic Partners, L.P. (Blum Strategic), formerly known as RCBA Strategic Partners, L.P., FS Equity Partners III, L.P. (FSEP III), a Delaware limited partnership, FS Equity Partners International, L.P. (FSEP International), a Delaware limited partnership, The Koll Holding Company, a California corporation, Frederic V. Malek, a director of the Company and CBRE, Raymond E. Wirta, the Chief Executive Officer and a director of the Company and CBRE, and Brett White, the President and a director of the Company and CBRE. Such shares of common stock of CBRE, which totaled 7,967,774 shares of common stock, were then cancelled. In addition, the Company offered to purchase for cash options outstanding to acquire common stock of CBRE at a purchase price per option equal to the greater of the amount by which $16.00 exceeded the exercise price of the option, if at all, or $1.00. In connection with the 2001 Merger, CBRE purchased its outstanding options on behalf of the Company, which were recorded as merger-related and other nonrecurring charges by CBRE in the period from January 1, 2001 to July 20, 2001.

        The funding to complete the 2001 Merger, as well as the refinancing of substantially all of the outstanding indebtedness of CBRE, was obtained through: (i) the cash contribution of $74.8 million from the sale of Class B common stock of the Company for $16.00 per share, (ii) the sale of shares of Class A common stock of the Company for $16.00 per share to employees and independent contractors of CBRE, (iii) the sale of 625,000 shares of Class A common stock of the Company to the California Public Employees' Retirement System for $16.00 per share, (iv) the issuance and sale by the Company of 65,000 units for $65.0 million to DLJ Investment Funding, Inc. and other purchasers, which units consist of $65.0 million in aggregate principal amount of 16% Senior Notes due July 20, 2011 and 339,820 shares of Class A common stock of the Company, (v) the issuance and sale by Blum CB of $229.0 million in aggregate principal amount of 111/4% Senior Subordinated Notes due June 15, 2011 for $225.6 million (which were assumed by CBRE in connection with the 2001 Merger) and (vi) borrowings by CBRE under a new $325.0 million senior credit facility with Credit Suisse First Boston (CSFB) and other lenders.

        Following the 2001 Merger, the common stock of CBRE was delisted from the New York Stock Exchange. CBRE also successfully completed a tender offer and consent solicitation for all of the

51



outstanding principal amount of its 87/8% Senior Subordinated Notes due 2006 (the Subordinated Notes). The Subordinated Notes were purchased at $1,079.14 for each $1,000 principal amount of Subordinated Notes, which included a consent payment of $30.00 per $1,000 principal amount of Subordinated Notes. The Company also repaid the outstanding balance of CBRE's existing revolving credit facility. The Company entered into the 2001 Merger in order to enhance the flexibility to operate CBRE's existing businesses and to develop new ones.

4.    Purchase Accounting

        The aggregate finalized purchase price for the acquisition of CBRE was approximately $399.5 million, which included: (1) shares of the Company's Class B common stock, valued at $16.00 per share, and warrants to acquire shares of the Company's Class B common stock issued to members of the buying group in exchange for shares of common stock of CBRE contributed to the Company immediately prior to the 2001 Merger and the cancellation of warrants to acquire common stock of CBRE; (2) $16.00 per share in cash paid to owners of common stock of CBRE, excluding shares owned by members of the buying group discussed above; (3) allocations in CBRE's deferred compensation plan (the DCP) from vested stock fund units, each of which was valued at $16.00 and which was entitled to one underlying share of CBRE common stock upon distribution from the DCP prior to the 2001 Merger, to other investments alternatives available under the DCP, in each case at the election of the applicable participant; (4) vested stock fund units held in the DCP, each of which was valued at $16.00 and which was converted to the right to receive one underlying share of the Company's Class A common stock upon distribution from the DCP after the 2001 Merger, that participants elected to continue to hold after the 2001 Merger; (5) unvested stock fund units held in the DCP, each of which was valued at $16.00 and which were automatically converted to the right to receive one underlying share of the Company's Class A common stock upon distribution from the DCP after the 2001 Merger and (6) direct costs incurred in connection with the 2001 Merger.

        The 2001 Merger was accounted for as a purchase by the Company. Prior to the 2001 Merger, no single member of the buying group, nor any combination thereof, controlled CBRE. After the completion of the 2001 Merger, Blum Strategic has control of CBRE. The shares of common stock of CBRE directly owned by Blum Strategic prior to the 2001 Merger, which were included in the shares owned by the buying group contributed to the Company, were valued at Blum Strategic's book value in the determination of the purchase price. All other shares of common stock of CBRE acquired by the Company were accounted for at a fair value of $16.00 per share in the determination of the purchase price. As such, the 2001 Merger was accounted for as a step purchase acquisition in accordance with SFAS No. 141, "Business Combinations,"and the net assets of CBRE acquired by the Company were adjusted to 86.5% of their estimated fair value.

        The preliminary purchase accounting adjustments of the Company were recorded in 2001 in the accompanying consolidated financial statements as of and for any periods subsequent to July 20, 2001. During 2002, the Company finalized the purchase price allocation, which included finalizing the fair values of all assets acquired and liabilities assumed as of the 2001 Merger date. The excess of the purchase price paid by the Company over the finalized fair value of the assets and liabilities of CBRE at the date of the 2001 Merger was approximately $594.9 million and is included in goodwill in the accompanying consolidated balance sheet as of December 31, 2002. This represents a $28.3 million reduction to what was originally estimated and reported at December 31, 2001. This net decrease was mainly due to the adjustment, net of the related tax impact, of certain intangible assets to their estimated fair values as of the acquisition date, which were finalized based on independent third party appraisals during 2002 (See Note 8 for additional information).

52



5.    Basis of Preparation

        The accompanying consolidated balance sheets as of December 31, 2002 and 2001, and the consolidated statements of operations, cash flows and stockholders' equity for the twelve months ended December 31, 2002 and for the period from February 20, 2001 (inception) through December 31, 2001, reflect the consolidated balance sheets, results of operations, cash flows and stockholders' equity of the Company from inception and also include the consolidated financial statements of CBRE from the date of the 2001 Merger, including all material adjustments required under the purchase method of accounting. For purposes of Regulation S-X, CBRE is considered the predecessor to the Company. As such, the historical financial statements of CBRE prior to the 2001 Merger are included in the accompanying consolidated financial statements, including the consolidated statements of operations, cash flows and stockholders' equity for the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000 (collectively "Predecessor financial statements"). The Predecessor financial statements have not been adjusted to reflect the acquisition of CBRE by the Company. As such, the consolidated financial statements of the Company after the 2001 Merger are not directly comparable to the Predecessor financial statements prior to the 2001 Merger.

        Unaudited pro forma results of the Company, assuming the 2001 Merger had occurred as of January 1, 2001, are presented below. These pro forma results have been prepared for comparative purposes only and include certain adjustments, such as increased interest expense as a result of debt acquired to finance the 2001 Merger. The 2001 proforma information excludes $18.3 million of merger-related and other nonrecurring charges. These pro forma results do not purport to be indicative of what operating results would have been and may not be indicative of future operating results (dollars in thousands, except share data):

 
  Twelve Months
Ended
December 31
2001

 
Revenue   $ 1,170,762  
Operating income   $ 76,496  
Net loss   $ (1,640 )
Basic and diluted loss per share   $ (0.11 )
Weighted average shares outstanding for basic and diluted loss per share     15,025,308  

6.    Acquisitions and Dispositions

        During 2001, the Company acquired a professional real estate services firm in Mexico for an aggregate purchase price of approximately $1.7 million in cash. The Company also purchased the remaining ownership interests that it did not already own in CB Richard Ellis/Hampshire, L.L.C. for a purchase price of approximately $1.8 million in cash.

        During 2000, the Company acquired five companies with an aggregate purchase price of approximately $3.4 million in cash, $0.7 million in notes, plus additional payments over the next five years based on acquisition earnout agreements. These payments will supplement the purchase price and be recorded as additional goodwill when paid, as applicable. The most significant acquisition in 2000 was the purchase of Boston Mortgage Capital Corporation (Boston Mortgage) by L.J. Melody for approximately $2.1 million, plus supplemental payments based on an acquisition earnout agreement. Boston Mortgage provides further mortgage banking penetration into the northeastern part of the US.

53



It services approximately $1.8 billion in loans covering roughly 175 commercial properties throughout New England, New York and New Jersey.

        In February 2000, the Company sold certain non-strategic assets for cash proceeds of $8.4 million, resulting in a pre-tax gain of $4.7 million.

7.    Property and Equipment

        Property and equipment consists of the following (dollars in thousands):

 
  December 31
 
 
  2002
  2001
 
Leasehold improvements   $ 20,000   $ 19,710  
Furniture and equipment     116,268     126,864  
Equipment under capital leases     13,925     27,541  
   
 
 
      150,193     174,115  
Accumulated depreciation and amortization     (83,559 )   (105,664 )
   
 
 
Property and equipment, net   $ 66,634   $ 68,451  
   
 
 

        Depreciation expense was $20.8 million for the twelve months ended December 31, 2002, $9.1 million for the period from February 20, 2001 (inception) through December 31, 2001, $12.6 million for the period from January 1, 2001 through July 20, 2001 and $19.2 million for the twelve months ended December 31, 2000.

8.    Goodwill and Other Intangible Assets

        In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 replaces APB Opinion No. 16, "Business Combinations," and requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. It also provides guidance on purchase accounting related to the recognition of intangible assets. Under SFAS No. 142, goodwill and other intangible assets deemed to have indefinite useful lives are no longer amortized but are subject to impairment tests, on an annual basis, at a minimum, or whenever events or circumstances occur indicating goodwill might be impaired. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and be reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

        The Company adopted SFAS No. 141 for all business combinations completed after June 30, 2001 and fully adopted SFAS No. 142 effective January 1, 2002. The Company identified its reporting units and determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those units for purposes of performing the required transitional goodwill impairment assessment.

        In June 2002, the Company completed the first step of the transitional goodwill impairment test which entailed comparing the fair value of each reporting unit to its carrying value. The Company determined that no impairment existed at the effective date of the implementation of the new standard. The Company also completed its required annual goodwill impairment test as of October 1, 2002 and determined that no impairment existed as of that date.

54


        Had the Company accounted for goodwill consistent with the provisions of SFAS No. 142 in prior periods, the Company's net income (loss) would have been affected as follows (dollars in thousands, except share data):

 
  Company
  Company
  Predecessor
  Predecessor
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

 
  Twelve Months
Ended
December 31, 2002

  February 20, 2001
(inception)
through
December 31, 2001

  Period from
January 1, 2001
through
July 20, 2001

  Twelve Months
Ended
December 31, 2000

Reported net income (loss)   $ 18,727   $ 17,426   $ (34,020 ) $ 33,388
Add back amortization of goodwill, net of taxes             7,701     14,054
   
 
 
 
Adjusted net income (loss)   $ 18,727   $ 17,426   $ (26,319 ) $ 47,442
   
 
 
 
Basic earnings (loss) per share:                        
Reported earnings (loss) per share   $ 1.25   $ 2.22   $ (1.60 ) $ 1.60
Add back goodwill amortization per share             0.36     0.67
   
 
 
 
Adjusted basic earnings (loss) per share   $ 1.25   $ 2.22   $ (1.24 ) $ 2.27
   
 
 
 
Diluted earnings (loss) per share:                        
Reported earnings (loss) per share   $ 1.23   $ 2.20   $ (1.60 ) $ 1.58
Add back goodwill amortization per share             0.36     0.67
   
 
 
 
Adjusted diluted earnings (loss) per share   $ 1.23   $ 2.20   $ (1.24 ) $ 2.25
   
 
 
 

        The Company has finalized the fair value of all assets and liabilities as of the merger date. The resulting changes in the carrying amount of goodwill for the twelve months ended December 31, 2002, are as follows (dollars in thousands):

 
  Americas
  EMEA
  Asia Pacific
  Total
 
Balance at January 1, 2002   $ 510,188   $ 96,637   $ 2,718   $ 609,543  
  Reclassed (to) from intangible assets     (57,841 )   3,617         (54,224 )
  Purchase accounting adjustments related to prior acquisitions     15,321     5,809     688     21,818  
   
 
 
 
 
Balance at December 31, 2002   $ 467,668   $ 106,063   $ 3,406   $ 577,137  
   
 
 
 
 

55


        Intangible assets totaled $91.1 million, net of accumulated amortization of $7.7 million, as of December 31, 2002 and are comprised of the following (dollars in thousands):

 
  As of December 31, 2002
 
  Gross Carrying
Amount

  Accumulated
Amortization

Amortizable intangible assets            
  Management contracts   $ 18,887   $ 5,605
  Loan servicing rights     16,234     2,134
   
 
  Total   $ 35,121   $ 7,739
   
 
Unamortizable intangible assets            
  Trademark   $ 63,700      
   
     

        In accordance with SFAS No. 141, the trademark was separately identified as a result of the 2001 Merger and has an indefinite life. The management contracts are being amortized over their weighted average useful lives of approximately 8.6 years and the loan servicing rights are being amortized over their weighted average useful lives of approximately 10.0 years. Amortization expense related to these intangible assets was $3.8 million for the year ended December 31, 2002. The estimated amortization expense for the five years ending December 31, 2007 approximates $3.8 million, $3.7 million, $3.7 million, $3.4 million and $3.4 million, respectively.

9.    Investments in and Advances to Unconsolidated Subsidiaries

        Investments in and advances to unconsolidated subsidiaries as of December 31, 2002 and 2001 are as follows (dollars in thousands):

 
   
  December 31
 
  Interest
  2002
  2001
CB Richard Ellis Strategic Partners, LP   2.9 % $ 10,690   $ 8,490
CB Commercial/Whittier Partners, LP   50.0 %   8,816     10,159
Global Innovation Partners, LLC   4.9 %   6,228     1,468
Strategic Partners II, LP.   3.4 %   5,965    
Ikoma CB Richard Ellis KK   20.0 %   4,782     4,132
KB Opportunity Investors   45.0 %   1,857     4,499
CB Richard Ellis/Pittsburgh, LP   50.0 %   1,461     1,108
CB Richard Ellis Corporate Partners, LLC   9.1 %       3,855
Other   *     10,409     8,824
       
 
Total       $ 50,208   $ 42,535
       
 

*
Various interests with varying ownership rates.

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        Combined condensed financial information for the entities accounted for using the equity method is as follows (dollars in thousands):

        Condensed Balance Sheets Information:

 
  December 31
 
  2002
  2001
Current assets   $ 127,635   $ 92,427
Noncurrent assets     1,552,546     866,224
Current liabilities     108,463     51,064
Noncurrent liabilities     664,241     392,357
Minority interest     3,938     265

        Condensed Statements of Operations Information:

 
  Year Ended
December 31, 2002

  Year Ended
December 31, 2001

  Year Ended
December 31, 2000

Net revenue   $ 349,121   $ 286,138   $ 241,902
Income from operations     78,171     60,259     59,936
Net income     81,498     30,098     50,183

        Included in other current assets in the accompanying consolidated balance sheets is a note receivable from the Company's equity investment in Investor 1031, LLC in the amount of $1.2 million as of December 31, 2002. This note was issued on June 20, 2002, bears interest at 20.0% per annum and is due for repayment on July 15, 2003.

        The Company's investment management business involves investing the Company's own capital in certain real estate investments with clients, including its equity investments in CB Richard Ellis Strategic Partners, LP, Global Innovation Partners, LLC and other co-investments included in the table above. The Company has provided investment management, property management, brokerage, appraisal and other professional services to these equity investees and earned revenues from these co-investments of $22.4 million, $15.4 million and $7.3 million during the years ended December 31, 2002, 2001 and 2000, respectively.

57



10.  Other Assets

        The following table summarizes the items included in other assets (dollars in thousands):

 
  December 31
 
  2002
  2001
Property held for sale   $ 45,883   $ 42,456
Deferred financing costs, net     20,467     23,346
Deposits     8,714     6,505
Cost investments     6,524     5,768
Notes receivable     4,943     4,895
Employee loans (1)     4,089    
Deferred compensation assets     1,440     3,520
Prepaid pension costs         13,588
Miscellaneous     1,797     2,754
   
 
Total   $ 93,857   $ 102,832
   
 

(1)
See Note 22 for additional information.

11.  Employee Benefit Plans

CBRE Holding, Inc., the Company

        Option Plans and Warrants.    As part of the 2001 Merger, the Company issued 255,477 warrants to purchase shares of Class B common stock with an exercise price of $30.00 per share. These warrants do not vest until August 26, 2007 and expire on August 27, 2007. The Company also issued 1,520,207 options to acquire Class A common stock at an exercise price of $16.00 per share. These options vest and are exercisable in 20% increments over a five-year period ending on July 20, 2006. All options and warrants will become fully vested and exercisable upon change in control of the Company.

CB Richard Ellis Services, Inc., the Predecessor

        Option Plans and Warrants.    At the effective time of the 2001 Merger, each holder of an option to acquire CBRE's common stock, whether or not vested, had the right to receive, in consideration for the cancellation of his or her options, an amount per share of common stock equal to the greater of (i) the amount by which $16.00 exceeded the exercise price of the option, if any, or (ii) $1.00 reduced in each case by applicable withholding taxes. Employees holding warrants to acquire shares of CBRE received $1.00 per share of common stock underlying the warrant. Warrants held by non-employees, other than FS Equity Partners III, L.P. and FS Equity Partners International, L.P. who received warrants to acquire shares of the Company's Class B common stock, were cancelled and no payments were made to such shareholders. As of December 31, 2001, there were no options or warrants outstanding to acquire CBRE's stock.

        The options and warrants outstanding prior to the 2001 Merger were issued in connection with various acquisitions and employee stock-based compensation plans, had exercise prices that ranged from $10.00 to $36.75, with vesting periods that ranged up to 5 years and expired at various dates through August 2010.

58



        A summary of the status of the Company's and the Predecessor's option plans and warrants is presented in the tables below:

 
  Company
 
  CBRE Holding, Inc.
 
  Shares
  Weighted
Average
Exercise
Price

  Exercisable
Shares

  Weighted
Average
Exercise
Price

Outstanding at February 20, 2001     $       $
Granted   1,775,684     18.01          
Forfeited   (17,186 )   16.00          
   
 
 
 
Outstanding at December 31, 2001   1,758,498     18.03      
Granted   123,873     16.00          
Forfeited   (175,295 )   16.00          
   
 
 
 
Outstanding at December 31, 2002   1,707,076   $ 18.10   277,575   $ 16.00
   
 
 
 
 
  Predecessor
 
  CB Richard Ellis Services, Inc.
 
  Shares
  Weighted
Average
Exercise
Price

  Exercisable
Shares

  Weighted
Average
Exercise
Price

Outstanding at December 31, 1999   3,075,356   $ 20.71   770,756   $ 21.86
Granted   487,710     24.81          
Forfeited/Expired   (223,056 )   19.84          
   
 
 
 
Outstanding at December 31, 2000   3,340,010     21.25   1,824,665     23.90
Exercised   (86,521 )   12.89          
Forfeited/Expired   (93,370 )   20.27          
Paid and/or cancelled as a result of the merger   (3,160,119 )   21.50          
   
 
 
 
Outstanding at July 20, 2001     $     $
   
 
 
 

        Option plans and warrants outstanding at December 31, 2002 and their related weighted average price and life information is presented below:

 
  Outstanding Options
and Warrants

  Exercisable Options
and Warrants

Exercise Prices

  Number
Outstanding

  Weighted
Average
Remaining
Contractural Life

  Weighted
Average
Exercise Price

  Number
Exercisable

  Weighted
Average
Exercise Price

$16.00   1,451,599   8.59   $ 16.00   277,575   $ 16.00
$30.00   255,477   4.66     30.00      
   
     
 
 
    1,707,076       $ 18.10   277,575   $ 16.00
   
     
 
 

        Deferred Compensation Plan (the DCP).    In 1994, CBRE implemented the DCP. Under the DCP, a select group of management and highly compensated employees can defer the payment of all or a portion of their compensation (including any bonus). The DCP permits participating employees to

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make an irrevocable election at the beginning of each year to receive at some future date these deferred amounts invested in interest bearing accounts, which are an unsecured liability of the Company, in shares of common stock of the Company, where elections are recorded to additional paid-in capital or in insurance products which function like mutual funds. The Company has elected to fund a portion of its obligation for deferrals in these insurance products, but is not obligated to do so in the future.

        As part of the 2001 Merger, the DCP was amended so that each stock fund unit was converted to the right to receive one share of Class A common stock of the Company. Each participant in the DCP who was a US employee or an independent contractor in specified states and had vested stock fund units prior to the 2001 Merger was permitted to make one of the following elections: (i) convert the value of his or her vested stock fund units, based upon the value of $16.00 per stock unit, into any of the insurance mutual fund alternatives or the Interest Index Fund II provided under the DCP, (ii) continue to hold the vested stock fund units in his or her account under the DCP or (iii) transfer amounts invested in insurance mutual fund alternatives into DCP stock fund units. In accordance with a change in control provision included in the terms of the DCP, stock fund units associated with the 1999 Company matching contribution, which were unvested prior to the 2001 Merger, became vested upon completion of the 2001 Merger, but remained as stock fund units.

        Each stock fund unit that was unvested prior to the 2001 Merger remained in participants' accounts, but after the 2001 Merger was converted to the right to receive one share of Class A common stock of the Company. These unvested stock fund units have been accounted for as a deferred compensation asset. The deferred compensation asset will be amortized as compensation expense over the remaining vesting period for such stock fund units in accordance with FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation," with $1.8 million charged to compensation expense for the twelve months ended December 31, 2002 and $0.9 million charged to compensation expense for the period from February 20, 2001 (inception) through December 31, 2001. The accompanying consolidated balance sheets include the unamortized balances totaling $1.9 million and $1.4 million in other current assets and other assets, respectively, as of December 31, 2002. Subsequent to the 2001 Merger, no new deferrals are allowed in stock fund units.

        In 2001, the Company announced a match for the Plan Year 2000, effective July 2001, in the amount of $8.0 million to be invested in an interest bearing account on behalf of participants. The 2000 Company Match vests at 20% per year, and will be fully vested by December 2005. The related compensation expense will be amortized over the vesting period. The amounts charged to expense for the 2000 Company match were $1.7 million for the twelve months ended December 31, 2002, $0.7 million for the period from February 20, 2001 (inception) through December 31, 2001 and $0.2 million for the period from January 1, 2001 through July 20, 2001.

        Included in the Company's accompanying consolidated balance sheets is the accumulated non-stock liability of $106.3 million and $105.1 million at December 31, 2002 and 2001, respectively, and the assets (in the form of insurance) set aside to cover the liability of $63.6 million and $69.4 million as of December 31, 2002 and 2001, respectively. In addition, the Company's deferred stock liability, included in additional paid-in capital, totaled $18.2 million and $18.8 million at December 31, 2002 and 2001, respectively.

        Stock Purchase Plans.    Prior to the 2001 Merger, CBRE had restricted stock purchase plans covering select key executives including senior management. A total of 500,000 and 550,000 shares of common stock were reserved for issuance under CBRE's 1999 and 1996 Equity Incentive Plans, respectively. The shares were issued to senior executives for a purchase price equal to the greater of

60



$18.00 and $10.00 per share or fair market value, respectively. The purchase price for these shares was paid either in cash or by delivery of a full recourse promissory note. All promissory notes related to the 1999 Equity Incentive Plan were repaid as part of the 2001 Merger. The majority of the notes related to the 1996 Equity Incentive Plan were also repaid, with the remaining unpaid outstanding balances of $0.6 million and $1.0 million as of December 31, 2002 and 2001, respectively, included in notes receivable from sale of stock in the accompanying consolidated statements of stockholders' equity. As part of the 2001 Merger, the CBRE shares related to these outstanding promissory notes were exchanged for shares of Class B common stock of the Company.

        Bonuses.    The Company has bonus programs covering select key employees, including senior management. Awards are based on the position and performance of the employee and the achievement of pre-established financial, operating and strategic objectives. The amounts charged to expense for bonuses were $40.2 million for the twelve months ended December 31, 2002, $18.0 million for the period from February 20, 2001 (inception) through December 31, 2001, $16.5 million for the period from January 1, 2001 through July 20, 2001 and $49.8 million for the twelve months ended December 31, 2000.

        Capital Accumulation Plan (the Cap Plan).    The Cap Plan is a defined contribution profit sharing plan under Section 401(k) of the Internal Revenue Code and is the Company's only such plan. Generally, a US employee of the Company is eligible to participate in the plan if the employee is at least 21 years old. The Cap Plan provides for participant contributions as well as discretionary employer contributions. A participant is allowed to contribute to the Cap Plan from 1% to 15%, in whole percentages of his or her compensation, subject to limits imposed by the U.S. Internal Revenue Code. Each year, the Company determines the amount of employer contributions, if any, it will contribute to the Cap Plan based on the performance and profitability of the Company's consolidated U.S. operations. The Company's contributions for the year are allocated to participants who are actively employed on the last day of the plan year in proportion to each participant's pre-tax contributions for that year, up to 5% of the participant's compensation. In connection with the Cap Plan, the Company incurred no expense for the twelve months ended December 31, 2002, $0.8 million for the period from February 20, 2001 (inception) through December 31, 2001, no expense for the period from January 1, 2001 through July 20, 2001 and $2.2 million for the twelve months ended December 31, 2000.

        In connection with the 2001 Merger, each share of common stock of CBRE formerly held by the Cap Plan and credited to participant accounts was exchanged for $16.00 in cash. In addition, the Cap Plan was amended to eliminate the common stock of CBRE as an investment option within the Cap Plan after July 20, 2001. The cash received for the shares of CBRE common stock was available for reinvestment in one or more of the investment alternatives available within the Cap Plan in accordance with the terms of the plan, including a new company stock fund in which employees could invest on a one-time basis in Class A shares of common stock of the Company. Subsequent to the 2001 Merger, participants are no longer entitled to purchase additional shares of CBRE Holding Class A or Class B common stock for allocation to their account balance.

        Pension Plan.    The Company, through the acquisition of Hillier Parker in the UK, maintains a contributory defined benefit pension plan to provide retirement benefits to existing and former Hillier Parker employees participating in the plan. It is the Company's policy to fund the minimum annual contributions required by applicable regulations. Pension expense totaled $3.6 million for the twelve months ended December 31, 2002, $1.4 million for the period February 20, 2001 (inception) through December 31, 2001, $0.9 million for the period from January 1, 2001 through July 20, 2001 and $0.9 million for the twelve months ended December 31, 2000.

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        As a result of the plan's under-funded status in 2002, the Company recorded a charge to accumulated other comprehensive loss, net of the related deferred tax impact, appropriately eliminating the prepaid pension asset and establishing a minimum liability for under-funding. This non-cash charge had no impact on net income or cash flow. The following sets forth a reconciliation of the benefit obligation, plan assets, plan's funded status and amounts recognized in the accompanying consolidated balance sheets (dollars in thousands):

 
  Company
  Company
  Predecessor
 
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard
Ellis Services,
Inc.

 
 
  Twelve Months
Ended
December 31, 2002

  February 20, 2001
(inception) through
December 31, 2001

  Period from
January 1, 2001
through

 
Change in benefit obligation                    
Benefit obligation at beginning of period   $ 74,418   $ 75,453   $ 71,076  
Service cost     5,578     2,325     2,875  
Interest cost     4,764     2,059     2,316  
Plan participant contributions     1,226     234     641  
Actuarial loss (gain)     3,997     (6,558 )   2,990  
Benefits paid     (1,939 )   (408 )   (1,109 )
Foreign currency translation     8,690     1,313     (3,336 )
   
 
 
 
Benefit obligation at end of period   $ 96,734   $ 74,418   $ 75,453  
   
 
 
 

Change in plan assets

 

 

 

 

 

 

 

 

 

 
Fair value of plan assets at beginning of period   $ 80,950   $ 87,603   $ 103,688  
Actual return on plan assets     (13,777 )   (8,430 )   (12,675 )
Company contributions     2,299     438     1,740  
Plan participant contributions     1,226     234     641  
Benefits paid     (1,939 )   (408 )   (1,109 )
Foreign currency translation     7,671     1,513     (4,682 )
   
 
 
 
Fair value of plan assets at end of period   $ 76,430   $ 80,950   $ 87,603  
   
 
 
 
Funded status   $ (20,304 ) $ 6,533   $ 12,150  
Unrecognized net actuarial loss     33,350     6,566     12,106  
Company contributions in the post-measurement period     530     489      
   
 
 
 
Net amount recognized   $ 13,576   $ 13,588   $ 24,256  
   
 
 
 
Net amount recognized in the consolidated balance sheets                    
Accrued benefit liability   $ (10,766 ) $   $  
Prepaid benefit cost         13,588     24,256  
Accumulated other comprehensive loss     24,342          
   
 
 
 
    $ 13,576   $ 13,588   $ 24,256  
   
 
 
 

62


        Weighted average assumptions used in developing the projected benefit obligation were as follows:

 
  Company
  Company
  Predecessor
 
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard
Ellis Services,
Inc.

 
 
  Twelve Months
Ended
December 31, 2002

  February 20, 2001
(inception) through
December 31, 2001

  Twelve Months
Ended
December 31, 2000

 
Discount rate   5.60 % 6.00 % 6.00 %
Expected return on plan assets   8.20 % 8.00 % 7.75 %
Rate of compensation increase   4.30 % 4.50 % 5.00 %

        Net periodic pension cost consisted of the following (dollars in thousands):

 
  Company
  Company
  Predecessor
  Predecessor
 
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard
Ellis Services,
Inc.

  CB Richard
Ellis Services,
Inc.

 
 
  Twelve Months
Ended
December 31, 2002

  February 20, 2001
(inception)
through
December 31, 2001

  Period from
January 1, 2001
through
July 20, 2001

  Twelve Months
Ended
December 31, 2000

 
Employer service cost   $ 5,578   $ 2,325   $ 2,875   $ 5,728  
Interest cost on projected benefit obligation     4,764     2,059     2,316     4,026  
Expected return on plan assets     (6,767 )   (2,945 )   (4,257 )   (8,395 )
Unrecognized net gain                 (425 )
   
 
 
 
 
Net periodic pension cost   $ 3,575   $ 1,439   $ 934   $ 934  
   
 
 
 
 

63


12.  Debt

        Total debt consists of the following (dollars in thousands):

 
  December 31
 
  2002
  2001
Long-Term Debt:            
111/4% Senior Subordinated Notes, net of unamortized discount of $3.1 million and $3.3 million at December 31, 2002 and 2001, respectively, due in 2011   $ 225,943   $ 225,737
Senior secured term loans, with interest ranging from 5.07% to 7.50%, due from 2002 through 2008     220,975     230,325
16% Senior Notes, net of unamortized discount of $5.1 million and $5.3 million at December 31, 2002 and 2001, respectively, due in 2011     61,863     59,656
Westmark Senior Notes, with interest at 9.0% through December 31, 2004 and at variable rates depending on the Company's credit facility rate thereafter, due from 2008 through 2010     12,129     14,863
Capital lease obligations, mainly for automobiles and telephone equipment, with interest ranging from 6.50% to 9.74%, due through 2007     763     1,438
Other     171     267
   
 
  Sub-total     521,844     532,286
  Less current maturities of long-term debt     10,711     10,223
   
 
  Total long-term debt     511,133     522,063
Short-Term Borrowings:            
Warehouse Line of Credit, with interest at 1.0% over the Residential Funding Corporation base rate with a maturity date of August 31, 2003     63,140     106,790
Non-recourse secured debt related to property held for sale with interest at one-month Yen LIBOR plus 4.95% and a maturity date of June 18, 2003     40,005     37,179
Euro cash pool loan, with interest ranging from 4.37% to 6.60% and no stated maturity date     7,904     11,162
Other     16     487
   
 
  Total short-term borrowings     111,065     155,618
  Add current maturities of long-term debt     10,711     10,223
   
 
  Total current debt     121,776     165,841
   
 
  Total debt   $ 632,909   $ 687,904
   
 

        Future annual aggregate maturities of total consolidated debt at December 31, 2002 are as follows (dollars in thousands): 2003—$121,776; 2004—$10,640; 2005—$10,623; 2006—$10,619; 2007—$6,244; and $473,007 thereafter.

        The Company issued $229.0 million in aggregate principal amount of 111/4% Senior Subordinated Notes due June 15, 2011 (the Notes), which were issued and sold by Blum CB Corp. for approximately $225.6 million, net of discount, on June 7, 2001 and assumed by CBRE in connection with the 2001 Merger. The Notes are jointly and severally guaranteed on a senior subordinated basis by the Company

64



and its domestic subsidiaries. The Notes require semi-annual payments of interest in arrears on June 15 and December 15, having commenced on December 15, 2001, and are redeemable in whole or in part on or after June 15, 2006 at 105.625% of par on that date and at declining prices thereafter. In addition, before June 15, 2004, the Company may redeem up to 35.0% of the originally issued amount of the Notes at 1111/4% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings. In the event of a change of control, the Company is obligated to make an offer to purchase the Notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest.

        The Company also entered into a $325.0 million Senior Credit Facility (the Credit Facility) with CSFB and other lenders. The Credit Facility is jointly and severally guaranteed by the Company and its domestic subsidiaries and is secured by substantially all of their assets. The Credit Facility includes the Tranche A term facility of $50.0 million, maturing on July 20, 2007; the Tranche B term facility of $185.0 million, maturing on July 18, 2008; and the revolving line of credit of $90.0 million, including revolving credit loans, letters of credit and a swingline loan facility, maturing on July 20, 2007. Borrowings under the Tranche A and revolving facility bear interest at varying rates based on the Company's option at either three-month LIBOR plus 2.50% to 3.25% or the alternate base rate plus 1.50% to 2.25% as determined by reference to the Company's ratio of total debt less available cash to EBITDA, which is defined in the debt agreement. Borrowings under the Tranche B facility bear interest at varying rates based on the Company's option at either three-month LIBOR plus 3.75% or the alternate base rate plus 2.75%. The alternate base rate is the higher of (1) CSFB's prime rate or (2) the Federal Funds Effective Rate plus one-half of one percent.

        The Tranche A facility will be repaid by July 20, 2007 through quarterly principal payments over six years, which total $7.5 million each year through June 30, 2003 and $8.75 million each year thereafter through July 20, 2007. The Tranche B facility requires quarterly principal payments of approximately $0.5 million, with the remaining outstanding principal due on July 18, 2008. The revolving line of credit requires the repayment of any outstanding balance for a period of 45 consecutive days commencing on any day in the month of December of each year as determined by the Company. The Company repaid its revolving credit facility as of November 5, 2002 and December 1, 2001 and at December 31, 2002 and 2001, the Company had no revolving line of credit principal outstanding.

        The Company issued an aggregate principal amount of $65.0 million of 16.0% Senior Notes due on July 20, 2011 (the Senior Notes). The Senior Notes are unsecured obligations, senior to all current and future unsecured indebtedness, but subordinated to all current and future secured indebtedness of the Company. Interest accrues at a rate of 16.0% per year and is payable quarterly in cash in arrears. Interest may be paid in kind to the extent CBRE's ability to pay cash dividends is restricted by the terms of the Credit Facility. Additionally, interest in excess of 12.0% may, at the Company's option, be paid in kind through July 2006. The Company elected to pay in kind interest in excess of 12.0%, or 4.0%, that was payable on April 20, 2002, July 20, 2002 and October 20, 2002. The Senior Notes are redeemable at the Company's option, in whole or in part, at 116.0% of par commencing on July 20, 2001 and at declining prices thereafter. As of December 31, 2002, the redemption price was 112.8% of par. In the event of a change in control, the Company is obligated to make an offer to purchase all of the outstanding Senior Notes at 101.0% of par.

        The Senior Notes are solely the Company's obligation to repay. CBRE has neither guaranteed nor pledged any of its assets as collateral for the Senior Notes and is not obligated to provide cashflow to the Company for repayment of these Senior Notes. However, the Company has no substantive assets or operations other than its investment in CBRE to meet any required principal and interest payments on

65



the Senior Notes. The Company will depend on CBRE's cash flows to fund principal and interest payments as they come due.

        The Notes, the Credit Facility and the Senior Notes all contain numerous restrictive covenants that, among other things, limit the Company's ability to incur additional indebtedness, pay dividends or distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, engage in transactions with affiliates, issue subsidiary equity and enter into consolidations or mergers. The Credit Facility requires the Company to maintain a minimum coverage ratio of interest and certain fixed charges and a maximum leverage and senior leverage ratio of earnings before interest, taxes, depreciation and amortization to funded debt. The Credit Facility requires the Company to pay a facility fee based on the total amount of the unused commitment.

        The Company has short-term borrowings of $111.1 million and $155.6 million with related weighted average interest rates of 3.9% and 4.5% as of December 31, 2002 and 2001, respectively.

        A subsidiary of the Company has a credit agreement with Residential Funding Corporation (RFC) for the purpose of funding mortgage loans that will be resold. The credit agreement in 2001 initially provided for a revolving line of credit of $150.0 million, bore interest at the greater of one-month LIBOR or 3.0% (RFC Base Rate), plus 1.0%, and expired on August 31, 2001. Through various executed amendments and extension letters in 2001, the revolving line of credit was increased to $350.0 million and the maturity date was extended to January 22, 2002.

        Effective January 23, 2002, the Company entered into a Second Amended and Restated Warehousing Credit and Security Agreement. This agreement provided for a revolving line of credit in the amount of $350.0 million until February 28, 2002 and $150.0 million for the period from March 1, 2002 through August 31, 2002. Additionally, on February 1, 2002, the Company executed a Letter Agreement with RFC that redefined the RFC Base Rate to the greater of one-month LIBOR or 2.25% per annum. On April 20, 2002, the Company obtained a temporary revolving line of credit increase of $210.0 million that resulted in a total line of credit equaling $360.0 million, which expired on July 31, 2002. Upon expiration of the temporary increase and through various executed amendments and extension letter agreements, the Company established a revolving line of credit of $200.0 million, redefined the RFC Base Rate to the greater of one-month LIBOR or 2.0% and extended the maturity date of the agreement to December 20, 2002. On December 16, 2002, the Company entered into the Third Amended and Restated Warehousing Credit and Security Agreement effective December 20, 2002. The agreement provides for a revolving line of credit of $200.0 million, bears interest at the RFC Base Rate plus 1.0% and expires on August 31, 2003.

        During the years ended December 31, 2002 and 2001, respectively, the Company had a maximum of $309.0 million and $164.0 million revolving line of credit principal outstanding with RFC. At December 31, 2002 and 2001, respectively, the Company had a $63.1 million and a $106.8 million warehouse line of credit outstanding, which are included in short-term borrowings in the accompanying consolidated balance sheets. Additionally, the Company had a $63.1 million and a $106.8 million warehouse receivable, which are also included in the accompanying consolidated balance sheets as of December 31, 2002 and 2001, respectively.

        A subsidiary of the Company has a credit agreement with JP Morgan Chase. The credit agreement provides for a non-recourse revolving line of credit of up to $20.0 million, bears interest at 1.0% of the bank's cost of funds and expires on May 28, 2003. At December 31, 2002 and 2001, the Company had no revolving line of credit principal outstanding.

66



        During 2001, the Company incurred $37.2 million of non-recourse debt through a joint venture. In September 2002, the maturity date on this non-recourse debt was extended to June 18, 2003.

13.  Commitments and Contingencies

        The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. Management believes that any liability that may result from disposition of these lawsuits will not have a material effect on the Company's consolidated financial position or results of operations.

        The following is a schedule by year of future minimum lease payments for noncancelable leases as of December 31, 2002 (dollars in thousands):

 
  Capital
Leases

  Operating
Leases

2003   $ 731   $ 66,632
2004     29     58,320
2005     9     50,966
2006     4     42,924
2007     3     35,090
Thereafter         233,379
   
 
Total minimum payments required   $ 776   $ 487,311
   
 

        The interest portion of capital lease payments represents the amount necessary to reduce net minimum lease payments to present value calculated at the Company's incremental borrowing rate at the inception of the leases. This totaled approximately $.01 million at December 31, 2002, resulting in a present value of net minimum lease payments of $.76 million. At December 31, 2002, $.72 million and $.04 million were included in current maturities of long-term debt and long-term debt, respectively. In addition, the total minimum payments for noncancelable operating leases were not reduced by the minimum sublease rental income of $4.3 million due in the future under noncancelable subleases.

        Substantially all leases require the Company to pay maintenance costs, insurance and property taxes, and generally may be renewed for five-year periods. The composition of total rental expense under noncancelable operating leases consisted of the following (dollars in thousands):

 
  Company
  Company
  Predecessor
  Predecessor
 
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard Ellis
Services, Inc.

  CB Richard Ellis
Services, Inc.

 
 
  Twelve Months Ended December 31, 2002
  February 20, 2001 (inception) through December 31, 2001
  Period from January 1, 2001 through July 20, 2001
  Twelve Months Ended December 31, 2000
 
Minimum rentals   $ 68,711   $ 27,203   $ 32,831   $ 56,243  
Less sublease rentals     (1,157 )   (500 )   (551 )   (1,387 )
   
 
 
 
 
    $ 67,554   $ 26,703   $ 32,280   $ 54,856  
   
 
 
 
 

        A subsidiary of the Company has an agreement with Fannie Mae to fund the purchase of a $104.6 million loan portfolio using proceeds from its RFC line of credit. A 100% participation in the

67



loan portfolio was sold to Fannie Mae with the Company retaining the credit risk on the first 2% of losses incurred on the underlying portfolio of commercial mortgage loans. The Company has collateralized a portion of its obligation to cover the first 1% of losses through a letter of credit in favor of Fannie Mae for a total of approximately $1.0 million.

        At December 31, 2002, the Company had outstanding letters of credit totaling $7.8 million, including the Fannie Mae letter of credit discussed in the preceding paragraph. The letters of credit expire at varying dates through December 2004.

        An important part of the strategy for the Company's investment management business involves investing the Company's own capital in certain real estate investments with its clients. These co-investments typically range from 2% to 5% of the equity in a particular fund. As of December 31, 2002, the Company had committed an additional $22.6 million to fund future co-investments.

14.  Income Taxes

        The Company's tax provision (benefit) consisted of the following (dollars in thousands):

 
  Company
  Company
  Predecessor
  Predecessor
 
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard Ellis
Services, Inc.

  CB Richard Ellis
Services, Inc.

 
 
  Twelve Months Ended December 31, 2002
  February 20, 2001 (inception) through December 31, 2001
  Period from January 1, 2001 through July 20, 2001
  Twelve Months Ended December 31, 2000
 
Federal:                          
  Current   $ 10,204   $ 11,747   $   $ 24,924  
  Deferred tax     6,232     (3,252 )   (911 )   921  
  Change in valuation allowances         796         (3,000 )
   
 
 
 
 
      16,436     9,291     (911 )   22,845  
State:                          
  Current     1,824     3,173     1,600     6,895  
  Deferred tax     378     (494 )   (658 )   (1,243 )
   
 
 
 
 
      2,202     2,679     942     5,652  
Foreign:                          
  Current     12,920     10,137     1,079     7,015  
  Deferred tax     (1,452 )   (4,091 )       (761 )
   
 
 
 
 
      11,468     6,046     1,079     6,254  
   
 
 
 
 
    $ 30,106   $ 18,016   $ 1,110   $ 34,751  
   
 
 
 
 

68


        The following is a reconciliation, stated as a percentage of pre-tax income, of the US statutory federal income tax rate to the Company's effective tax rate on income from operations:

 
  Company
  Company
  Predecessor
  Predecessor
 
 
  CBRE
Holding,
Inc.

  CBRE
Holding,
Inc.

  CB Richard Ellis
Services, Inc.

  CB Richard Ellis
Services, Inc.

 
 
  Twelve Months Ended December 31, 2002
  February 20, 2001 (inception) through December 31, 2001
  Period from January 1, 2001 through July 20, 2001
  Twelve Months Ended December 31, 2000
 
Federal statutory tax rate   35 % 35 % (35 )% 35 %
Permanent differences   15   5   25   11  
State taxes, net of federal benefit   3   5   2   6  
Foreign income taxes in excess of US rate   9   4   11   4  
Change in valuation allowances     2     (5 )
   
 
 
 
 
Effective tax rate   62 % 51 % 3 % 51 %
   
 
 
 
 

        The domestic component of income (loss) before provision for income taxes included in the accompanying consolidated statements of operations was $31.0 million for the twelve months ended December 31, 2002, $22.5 million for the period from February 20, 2001 (inception) through December 31, 2001, $(23.0) million for the period January 1, 2001 to July 20, 2001 and $63.2 million for the twelve months ended December 31, 2000. The international component of income (loss) before provision for income taxes was $17.8 million for the twelve months ended December 31, 2002, $12.9 million for the period from February 20, 2001 (inception) through December 31, 2001, $(9.9) million for the period from January 1, 2001 through July 20, 2001 and $4.9 million for the twelve months ended December 31, 2000.

        Cumulative tax effects of temporary differences are shown below at December 31, 2002 and 2001 (dollars in thousands):

 
  December 31
 
 
  2002
  2001
 
Asset (Liability)              
Property and equipment   $ 10,960   $ 16,665  
Bad debts and other reserves     12,459     10,225  
Intangible amortization     (26,065 )   (2,311 )
Bonus, unexercised restricted stock, deferred compensation     57,780     53,418  
Investment     4,189     5,045  
Net operating loss (NOL) and alternative minimum tax credit carryforwards     5     3,778  
Unconsolidated affiliates     5,283     7,568  
Pension obligation     7,303      
All other, net     (2,923 )   3,312  
   
 
 
Net deferred tax asset before valuation allowances     68,991     97,700  
Valuation allowances     (13,892 )   (11,543 )
   
 
 
  Net deferred tax asset   $ 55,099   $ 86,157  
   
 
 

69


        The Company had no federal income tax NOLs at December 31, 2002.

        Management has determined that as of December 31, 2002, $13.9 million of deferred tax assets do not satisfy the recognition criteria set forth in SFAS No. 109. Accordingly, a valuation allowance has been recorded for this amount. Approximately $13.1 million of this valuation allowance relates to deferred tax assets acquired in the 2001 Merger. Accordingly, goodwill will be reduced at such time as these deferred tax assets are realized.

        A deferred US tax liability has not been provided on the unremitted earnings of foreign subsidiaries because it is the intent of the Company to permanently reinvest these earnings. Undistributed earnings of foreign subsidiaries, which have been, or are intended to be, permanently invested in accordance with APB No. 23, "Accounting for Income Taxes—Special Areas," aggregated $52.0 million at December 31, 2002. The determination of the tax liability upon repatriation is not practicable.

15.  Stockholders' Equity

        The Company is authorized to issue 100,000,000 shares of common stock, including 75,000,000 shares of Class A common stock and 25,000,000 shares of Class B common stock, both with $0.01 par value per share. The holders of Class A common stock are entitled to one vote for each share. Holders of Class B common stock are entitled to ten votes for each share. There are no differences between the two classes of common stock other than number of votes. The holders of Class A and Class B common stock shall share equally on a per-share basis all dividends and other cash, stock or property distributions.

        Upon written request of any holder of Class B common stock, any shares will be automatically converted on a share-for-share basis into the same number of shares of Class A common stock. In addition, upon any transfer, sale, or other disposition of the Company, shares of Class B common stock shall be converted into shares of Class A common stock on a share-for-share basis, excluding the transfer to certain permitted Class B common stockholders. Also, upon completion of an underwritten public offering in which the Company becomes listed on a national securities exchange, all outstanding shares of Class B common stock shall automatically be converted into shares of Class A common stock on a share-for-share basis.

        As long as Class B common stock is outstanding, if a holder of Class B common stock purchases any shares of Class A common stock, the holder may convert the Class A common shares on a share-for-share basis into the same number of shares of Class B common stock.

70



16.  Earnings (Loss) Per Share Information

        The following is a calculation of earnings (loss) per share (dollars in thousands, except share data):

 
  Company
  Company
 
  CBRE Holding, Inc.
  CBRE Holding, Inc.
 
  Twelve Months Ended December 31, 2002
  February 20, 2001 (inception) through December 31, 2001
 
  Income
  Shares
  Per-
Share
Amount

  Income
  Shares
  Per-
Share
Amount

Basic earnings per share:                                
  Net income applicable to common stockholders   $ 18,727   15,025,308   $ 1.25   $ 17,426   7,845,004   $ 2.22
   
 
 
 
 
 
Diluted earnings per share:                                
  Net income applicable to common stockholders   $ 18,727   15,025,308         $ 17,426   7,845,004      
  Dilutive effect of contingently issuable shares         196,803               64,793      
   
 
       
 
     
  Net income applicable to common stockholders   $ 18,727   15,222,111   $ 1.23   $ 17,426   7,909,797   $ 2.20
   
 
 
 
 
 

71


 
  Predecessor
  Predecessor
 
  CBRE Richard Ellis Services, Inc.
  CBRE Richard Ellis Services, Inc.
 
  Period from January 1, 2001 through July 20, 2001
  Twelve Months Ended Decmeber 31, 2000
 
  Loss
  Shares
  Per-
Share
Amount

  Income
  Shares
  Per-
Share
Amount

Basic (loss) earnings per share:                                
  Net (loss) income applicable to common stockholders   $ (34,020 ) 21,306,584   $ (1.60 ) $ 33,388   20,931,111   $ 1.60
   
 
 
 
 
 
Diluted (loss) earnings per share:                                
  Net (loss) income applicable to common stockholders   $ (34,020 ) 21,306,584         $ 33,388   20,931,111      
  Dilutive effect of exercise of options outstanding                       35,594      
  Dilutive effect of stock-based compensation programs                       130,535      
   
 
       
 
     
  Net (loss) income applicable to common stockholders   $ (34,020 ) 21,306,584   $ (1.60 ) $ 33,388   21,097,240   $ 1.58
   
 
 
 
 
 

        The following items were not included in the computation of diluted earnings (loss) per share because their effect, in aggregate, was anti-dilutive:

 
  Company
  Company
  Predecessor
  Predecessor
 
  CBRE
Holding, Inc.

  CBRE
Holding, Inc.

  CB Richard Ellis
Services, Inc.

  CB Richard Ellis
Services, Inc.

 
  Twelve Months
Ended
December 31, 2002

  February 20, 2001 (inception) through December 31, 2001
  Period from January 1, 2001 through July 20, 2001
  Twelve Months
Ended
December 31, 2000

Stock options                
  Outstanding   1,451,599   1,503,021   2,562,150   2,574,029
  Price ranges   $16.00   $16.00   $0.38 - $36.75   $11.81 - $36.75
  Expiration ranges   7/20/11 - 7/31/12   7/20/11   6/8/04 - 8/31/10   6/8/04 - 8/31/10
Stock warrants                
  Outstanding   255,477   255,477   597,969   598,387
  Price   $30.00   $30.00   $30.00   $30.00
  Expiration date   8/27/07   8/27/07   8/28/04   8/28/04

        All options and warrants for the period from January 1, 2001 to July 20, 2001 were anti-dilutive as the Company reported a net loss. Any assumed exercise of options or warrants would have been anti-dilutive as they would have resulted in a lower loss per share.

17.  Fiduciary Funds

        The accompanying consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which amounted to $414.6 million and $373.2 million at December 31, 2002 and 2001, respectively.

72



18.  Fair Value of Financial Instruments

        SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Value is defined as the amount at which an instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The fair value estimates of financial instruments are not necessarily indicative of the amounts the Company might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

        Cash and Cash Equivalents:    Includes cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short maturity of these instruments.

        Short-Term Borrowings:    The majority of this balance represents the warehouse line of credit and non recourse debt related to a property held for sale. Due to their short-term maturities and variable interest rates, fair value approximates carrying value (See Note 12).

        Senior Subordinated Notes:    Based on dealers' quotes, the estimated fair value of the Company's 111/4% Senior Subordinated Notes is $208.4 million and $199.5 million at December 31, 2002 and 2001, respectively. Their actual carrying value totaled $225.9 million and $225.7 million at December 31, 2002 and 2001, respectively (See Note 12).

        16% Senior Notes:    There was no trading activity for the 16% Senior Notes, which are due in 2011. Their carrying value totaled $61.9 million and $59.7 million at December 31, 2002 and 2001, respectively (see Note 12).

        Senior Secured Terms Loans & Other Long-Term Debt:    Estimated fair values approximate respective carrying values because the majority of these instruments are based on variable interest rates (see Note 12).

19.  Nonrecurring Charges

        During the period from February 20, 2001 (inception) through December 31, 2001, the Company recorded nonrecurring pre-tax charges totaling $6.4 million which mainly related to the write-off of e-business investments. During the period from January 1, 2001 through July 20, 2001, CBRE recorded merger-related and other nonrecurring charges of $22.1 million, which included merger-related costs incurred of $16.4 million, severance costs incurred of $2.8 million related to CBRE's cost reduction program implemented in May 2001, as well as the write-off of an e-investment of $2.9 million.

20.  Guarantor and Nonguarantor Financial Statements

        In connection with the 2001 Merger with Blum CB and as part of the financing of the 2001 Merger, CBRE assumed an aggregate of $229.0 million in Senior Subordinated Notes (the Notes) due June 15, 2011. These Notes are unsecured and rank equally in right of payment with any of the Company's future senior subordinated unsecured indebtedness. The Notes are effectively subordinated to indebtedness and other liabilities of the Company's subsidiaries that are not guarantors of the Notes. The Notes are guaranteed on a full, unconditional, joint and several basis by the Company, CBRE and CBRE's wholly owned domestic subsidiaries.

73



        The following condensed consolidating financial information includes:

        Investments in consolidated subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in consolidated subsidiaries and intercompany balances and transactions.

74


CBRE HOLDING, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
(Dollars in thousands)

 
  Parent
  CBRE
  Guarantor
Subsidiaries

  Nonguarantor
Subsidiaries

  Elimination
  Consolidated
Total

Current Assets:                                    
  Cash and cash equivalents   $ 127   $ 54   $ 74,173   $ 5,347   $   $ 79,701
  Receivables, less allowance for doubtful accounts         40     61,624     104,549         166,213
  Warehouse receivable             63,140             63,140
  Prepaid and other current assets     18,723     22,201     8,432     7,729     (20,199 )   36,886
   
 
 
 
 
 
    Total current assets     18,850     22,295     207,369     117,625     (20,199 )   345,940
Property and equipment, net             51,419     15,215         66,634
Goodwill             442,965     134,172         577,137
Other intangible assets, net             89,075     2,007         91,082
Cash surrender value of insurance policies, deferred compensation plan         63,642                 63,642
Investment in and advances to unconsolidated subsidiaries         4,782     39,205     6,221         50,208
Investment in consolidated subsidiaries     302,593     322,794     66,162         (691,549 )  
Inter-company loan receivable         429,396             (429,396 )  
Deferred tax assets, net     36,376                     36,376
Other assets     4,896     17,464     20,453     51,044         93,857
   
 
 
 
 
 
    Total assets   $ 362,715   $ 860,373   $ 916,648   $ 326,284   $ (1,141,144 ) $ 1,324,876
   
 
 
 
 
 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Accounts payable and accrued expenses   $ 2,137   $ 4,610   $ 36,895   $ 58,773   $   $ 102,415
  Inter-company payable     20,199                 (20,199 )  
  Compensation and employee benefits payable             40,938     22,796         63,734
  Accrued bonus and profit sharing             59,942     43,916         103,858
  Income taxes payable     15,451                     15,451
  Short-term borrowings:                                    
    Warehouse line of credit             63,140             63,140
    Other             16     47,909         47,925
   
 
 
 
 
 
    Total short-term borrowings             63,156     47,909         111,065
  Current maturities of long-term debt         9,975         736         10,711
   
 
 
 
 
 
    Total current liabilities     37,787     14,585     200,931     174,130     (20,199 )   407,234
Long-Term Debt:                                    
  111/4% senior subordinated notes, net of unamortized discount         225,943                 225,943
  Senior secured term loans         211,000                 211,000
  16% senior notes, net of unamortized discount     61,863                     61,863
  Other long-term debt             12,129     198         12,327
  Inter-company loan payable             362,344     67,052     (429,396 )  
   
 
 
 
 
 
    Total long-term debt     61,863     436,943     374,473     67,250     (429,396 )   511,133
Deferred compensation liability         106,252                 106,252
Other liabilities     11,724         18,450     13,127         43,301
   
 
 
 
 
 
    Total liabilities     111,374     557,780     593,854     254,507     (449,595 )   1,067,920

Minority interest

 

 


 

 


 

 


 

 

5,615

 

 


 

 

5,615

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

251,341

 

 

302,593

 

 

322,794

 

 

66,162

 

 

(691,549

)

 

251,341
   
 
 
 
 
 
    Total liabilities and stockholders' equity   $ 362,715   $ 860,373   $ 916,648   $ 326,284   $ (1,141,144 ) $ 1,324,876
   
 
 
 
 
 

75


CBRE HOLDING, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
(Dollars in thousands)

 
  Parent
  CBRE
  Guarantor
Subsidiaries

  Nonguarantor
Subsidiaries

  Elimination
  Consolidated
Total

Current Assets:                                    
  Cash and cash equivalents   $ 3   $ 931   $ 42,204   $ 14,312   $   $ 57,450
  Receivables, less allowance for doubtful accounts     47     71     70,343     85,973         156,434
  Warehouse receivable             106,790             106,790
  Prepaid and other current assets     32,155     12,465     6,321     8,353     (10,321 )   48,973
   
 
 
 
 
 
    Total current assets     32,205     13,467     225,658     108,638     (10,321 )   369,647
Property and equipment, net             51,314     17,137         68,451
Goodwill         197,748     208,432     203,363         609,543
Other intangible assets, net             31,219     6,898         38,117
Cash surrender value of insurance policies, deferred compensation plan         69,385                 69,385
Investment in and advances to unconsolidated subsidiaries         4,132     34,296     4,107         42,535
Investment in consolidated subsidiaries     271,615     65,690     168,974         (506,279 )  
Inter-company loan receivable         465,173             (465,173 )  
Deferred tax assets, net     54,002                     54,002
Prepaid pension costs                 13,588         13,588
Other assets     5,266     21,600     14,739     47,639         89,244
   
 
 
 
 
 
    Total assets   $ 363,088   $ 837,195   $ 734,632   $ 401,370   $ (981,773 ) $ 1,354,512
   
 
 
 
 
 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Accounts payable and accrued expenses   $ 2,022   $ 4,236   $ 37,325   $ 39,399   $   $ 82,982
  Inter-company payable     10,321                 (10,321 )  
  Compensation and employee benefits payable             44,192     23,926         68,118
  Accrued bonus and profit sharing             56,821     28,367         85,188
  Income taxes payable     21,736                     21,736
  Short-term borrowings:                                    
    Warehouse line of credit             106,790             106,790
    Other         178     309     48,341         48,828
   
 
 
 
 
 
    Total short-term borrowings         178     107,099     48,341         155,618
  Current maturities of long-term debt         9,350     129     744         10,223
   
 
 
 
 
 
    Total current liabilities     34,079     13,764     245,566     140,777     (10,321 )   423,865
Long-Term Debt:                                    
  111/4% senior subordinated notes, net of unamortized discount         225,737                 225,737
  Senior secured term loans         220,975                 220,975
  16% senior notes, net of unamortized discount     59,656                     59,656
  Other long-term debt             14,974     721         15,695
  Inter-company loan payable             393,827     71,346     (465,173 )  
   
 
 
 
 
 
    Total long-term debt     59,656     446,712     408,801     72,067     (465,173 )   522,063
Deferred compensation liability         105,104                 105,104
Other liabilities     16,830         14,575     15,256         46,661
   
 
 
 
 
 
    Total liabilities     110,565     565,580     668,942     228,100     (475,494 )   1,097,693

Minority interest

 

 


 

 


 

 


 

 

4,296

 

 


 

 

4,296

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

252,523

 

 

271,615

 

 

65,690

 

 

168,974

 

 

(506,279

)

 

252,523
   
 
 
 
 
 
    Total liabilities and stockholders' equity   $ 363,088   $ 837,195   $ 734,632   $ 401,370   $ (981,773 ) $ 1,354,512
   
 
 
 
 
 

76


CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
(Dollars in thousands)
(Company)

 
  Parent
  CBRE
  Guarantor
Subsidiaries

  Nonguarantor
Subsidiaries

  Elimination
  Consolidated
Total

 
Revenue   $   $   $ 849,563   $ 320,714   $   $ 1,170,277  
Costs and expenses:                                      
  Commissions, fees and other incentives             413,830     141,112         554,942  
  Operating, administrative and other     415     1,186     345,231     147,117         493,949  
  Depreciation and amortization             15,833     8,781         24,614  
  Equity income from unconsolidated subsidiaries         (662 )   (7,449 )   (1,215 )       (9,326 )
  Merger-related and other nonrecurring charges         36                 36  
   
 
 
 
 
 
 
Operating (loss) income     (415 )   (560 )   82,118     24,919         106,062  
Interest income     158     42,845     2,079     916     (42,726 )   3,272  
Interest expense     11,344     42,731     39,742     9,410     (42,726 )   60,501  
Equity income from consolidated subsidiaries     27,306     32,898     4,957         (65,161 )    
   
 
 
 
 
 
 
Income before (benefit) provision for income taxes     15,705     32,452     49,412     16,425     (65,161 )   48,833  
(Benefit) provision for income taxes     (3,022 )   5,146     16,514     11,468         30,106  
   
 
 
 
 
 
 
Net income   $ 18,727   $ 27,306   $ 32,898   $ 4,957   $ (65,161 ) $ 18,727  
   
 
 
 
 
 
 

77


CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 20, 2001 (INCEPTION) THROUGH DECEMBER 31, 2001
(Dollars in thousands)
(Company)

 
  Parent
  CBRE
  Guarantor
Subsidiaries

  Nonguarantor
Subsidiaries

  Elimination
  Consolidated
Total

 
Revenue   $   $   $ 416,446   $ 146,382   $   $ 562,828  
Costs and expenses:                                      
  Commissions, fees and other incentives             207,019     59,745         266,764  
  Operating, administrative and other     500     3,589     145,145     67,012         216,246  
  Depreciation and amortization             8,523     3,675         12,198  
  Equity income from unconsolidated subsidiaries         (198 )   (1,290 )   (66 )       (1,554 )
  Merger-related and other nonrecurring charges         2,144     3,530     768         6,442  
   
 
 
 
 
 
 
Operating (loss) income     (500 )   (5,535 )   53,519     15,248         62,732  
Interest income     1,135     19,270     370     561     (18,909 )   2,427  
Interest expense     8,199     20,353     17,091     2,983     (18,909 )   29,717  
Equity income from consolidated subsidiaries     22,721     27,713     8,605         (59,039 )    
   
 
 
 
 
 
 
Income before (benefit) provision for income taxes     15,157     21,095     45,403     12,826     (59,039 )   35,442  
(Benefit) provision for income taxes     (2,269 )   (1,626 )   17,690     4,221         18,016  
   
 
 
 
 
 
 
Net income   $ 17,426   $ 22,721   $ 27,713   $ 8,605   $ (59,039 ) $ 17,426  
   
 
 
 
 
 
 

78


CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2001 THROUGH JULY 20, 2001
(Dollars in thousands)
(Predecessor)

 
  CBRE
  Guarantor
Subsidiaries

  Nonguarantor
Subsidiaries

  Elimination
  Consolidated
Total

 
Revenue   $   $ 465,280   $ 142,654   $   $ 607,934  
Costs and expenses:                                
  Commissions, fees and other incentives         217,799     63,014         280,813  
  Operating, administrative and other     1,155     216,063     79,168         296,386  
  Depreciation and amortization         17,021     8,635         25,656  
  Equity income from unconsolidated subsidiaries     (492 )   (2,141 )   (241 )       (2,874 )
  Merger-related and other nonrecurring charges     19,260     2,867             22,127  
   
 
 
 
 
 
Operating (loss) income     (19,923 )   13,671     (7,922 )       (14,174 )
Interest income     16,757     952     615     (16,757 )   1,567  
Interest expense     18,014     14,952     4,094     (16,757 )   20,303  
Equity losses from consolidated subsidiaries     (14,587 )   (12,480 )       27,067      
   
 
 
 
 
 
Loss before (benefit) provision for income taxes     (35,767 )   (12,809 )   (11,401 )   27,067     (32,910 )
(Benefit) provision for income taxes     (1,747 )   1,778     1,079         1,110  
   
 
 
 
 
 
Net loss   $ (34,020 ) $ (14,587 ) $ (12,480 ) $ 27,067   $ (34,020 )
   
 
 
 
 
 

79


CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
(Dollars in thousands)
(Predecessor)

 
  CBRE
  Guarantor
Subsidiaries

  Nonguarantor
Subsidiaries

  Elimination
  Consolidated
Total

 
Revenue   $   $ 1,027,359   $ 296,245   $   $ 1,323,604  
Costs and expenses:                                
  Commissions, fees and other incentives         507,061     121,036         628,097  
  Operating, administrative and other     3,375     396,027     152,126         551,528  
  Depreciation and amortization         26,604     16,595         43,199  
  Equity (income) losses from unconsolidated subsidiaries     (995 )   (5,615 )   105         (6,505 )
   
 
 
 
 
 
Operating (loss) income     (2,380 )   103,282     6,383         107,285  
Interest income     32,969     1,389     876     (32,680 )   2,554  
Interest expense     37,980     29,151     7,249     (32,680 )   41,700  
Equity income (losses) from consolidated subsidiaries     39,157     (5,300 )       (33,857 )    
   
 
 
 
 
 
Income before (benefit) provision for income taxes     31,766     70,220     10     (33,857 )   68,139  
(Benefit) provision for income taxes     (1,622 )   31,063     5,310         34,751  
   
 
 
 
 
 
Net income (loss)   $ 33,388   $ 39,157   $ (5,300 ) $ (33,857 ) $ 33,388  
   
 
 
 
 
 

80


CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
(Dollars in thousands)
(Company)

 
  Parent
  CBRE
  Guarantor
Subsidiaries

  Nonguarantor
Subsidiaries

  Consolidated
Total

 
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:   $ 509   $ (7,905 ) $ 42,090   $ 30,188   $ 64,882  
CASH FLOWS FROM INVESTING ACTIVITIES                                
Capital expenditures, net of concessions received             (10,049 )   (4,217 )   (14,266 )
Proceeds from sale of properties, businesses and servicing rights             2,515     3,863     6,378  
Acquisition of businesses including net assets acquired, intangibles and goodwill         (11,588 )   (35 )   (3,188 )   (14,811 )
Other investing activities, net         44     196     (1,671 )   (1,431 )
   
 
 
 
 
 
  Net cash used in investing activities         (11,544 )   (7,373 )   (5,213 )   (24,130 )
CASH FLOWS FROM FINANCING ACTIVITIES:                                
Proceeds from revolver and swingline credit facility         238,000             238,000  
Repayment of revolver and swingline credit facility         (238,000 )           (238,000 )
Repayment of senior notes and other loans, net         (189 )   (3,116 )   (4,900 )   (8,205 )
Repayment of senior secured term loans         (9,351 )           (9,351 )
Decrease (increase) in intercompany receivables, net         28,284     462     (28,746 )    
Other financing activities, net     (385 )   (172 )   (94 )   369     (282 )
   
 
 
 
 
 
  Net cash (used in) provided by financing activities     (385 )   18,572     (2,748 )   (33,277 )   (17,838 )
   
 
 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     124     (877 )   31,969     (8,302 )   22,914  
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD     3     931     42,204     14,312     57,450  
Effect of currency exchange rate changes on cash                 (663 )   (663 )
   
 
 
 
 
 
CASH AND CASH EQUIVALENTS, AT END OF PERIOD   $ 127   $ 54   $ 74,173   $ 5,347   $ 79,701  
   
 
 
 
 
 
SUPPLEMENTAL DATA:                                
  Cash paid during the period for:                                
    Interest (net of amount capitalized)   $ 8,509   $ 38,751   $ 1,635   $ 3,752   $ 52,647  
    Income taxes, net of refunds   $ 19,142   $   $   $   $ 19,142  

81


CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 20, 2001 (INCEPTION) THROUGH DECEMBER 31, 2001
(Dollars in thousands)
(Company)

 
  Parent
  CBRE
  Guarantor
Subsidiaries

  Nonguarantor
Subsidiaries

  Elimination
  Consolidated
Total

 
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES   $ 310   $ 5,947   $ 56,478   $ 28,599   $   $ 91,334  
CASH FLOWS FROM INVESTING ACTIVITIES:                                      
Capital expenditures, net of concessions received             (4,246 )   (2,255 )       (6,501 )
Proceeds from sale of properties, businesses and servicing rights             1,996     112         2,108  
Purchase of investments             (250 )   (831 )       (1,081 )
Investment in property held for sale                 (40,174 )       (40,174 )
Contribution to CBRE     (154,881 )               154,881      
Acquisition of businesses including net assets acquired, intangibles and goodwill         (212,369 )   (1,850 )   (483 )       (214,702 )
Other investing activities, net         (1 )   (1,700 )   658         (1,043 )
   
 
 
 
 
 
 
  Net cash used in investing activities     (154,881 )   (212,370 )   (6,050 )   (42,973 )   154,881     (261,393 )
CASH FLOWS FROM FINANCING ACTIVITIES:                                      
Proceeds from revolver and swingline credit facility         113,750                 113,750  
Repayment of revolver and swingline credit facility         (113,750 )               (113,750 )
Proceeds from senior secured term loans         235,000                 235,000  
Repayment of senior secured term loans         (4,675 )               (4,675 )
Proceeds from non recourse debt related to property held for sale                 37,179         37,179  
Repayment of 87/8% senior subordinated notes         (175,000 )               (175,000 )
Proceeds from 111/4% senior subordinated notes         225,629                 225,629  
Proceeds from 16% senior notes     65,000                     65,000  
Repayment of revolving credit facility         (235,000 )               (235,000 )
Repayment of senior notes and other loans, net             (1,185 )   (3 )       (1,188 )
Payment of deferred financing fees     (2,582 )   (19,168 )               (21,750 )
Proceeds from issuance of stock     92,156     154,881             (154,881 )   92,156  
Decrease (increase) in intercompany receivables, net         30,263     (6,981 )   (23,282 )        
Other financing activities, net         (5,535 )   (103 )   2,118         (3,520 )
   
 
 
 
 
 
 
  Net cash provided by (used in) financing activities     154,574     206,395     (8,269 )   16,012     (154,881 )   213,831  
   
 
 
 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     3     (28 )   42,159     1,638         43,772  
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD         959     45     12,658         13,662  
Effect of currency exchange rate changes on cash                 16         16  
   
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, AT END OF PERIOD   $ 3   $ 931   $ 42,204   $ 14,312   $   $ 57,450  
   
 
 
 
 
 
 
SUPPLEMENTAL DATA:                                      
  Cash paid during the period for:                                      
    Interest (net of amount capitalized)   $ 2,600   $ 22,562   $ 874   $ 90   $   $ 26,126  
    Income taxes, net of refunds   $ 5,061   $   $   $   $   $ 5,061  

82


CBRE HOLDING, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2001 THROUGH JULY 20, 2001
(Dollars in thousands)
(Predecessor)

 
  CBRE
  Guarantor
Subsidiaries

  Nonguarantor
Subsidiaries

  Consolidated
Total

 
CASH FLOWS USED IN OPERATING ACTIVITIES   $ (37,633 ) $ (53,363 ) $ (29,234 ) $ (120,230 )
CASH FLOWS FROM INVESTING ACTIVITIES:                          
Capital expenditures, net of concessions received         (11,309 )   (3,505 )   (14,814 )
Proceeds from sale of properties, businesses and servicing rights         9,105     439     9,544  
Purchases of investments         (2,500 )   (702 )   (3,202 )
Investment in property held for sale             (2,282 )   (2,282 )
Acquisition of businesses including net assets acquired, intangibles and goodwill         (31 )   (1,893 )   (1,924 )
Other investing activities, net     251     (524 )   812     539  
   
 
 
 
 
  Net cash provided by (used in) investing activities     251     (5,259 )   (7,131 )   (12,139 )
CASH FLOWS FROM FINANCING ACTIVITIES:                          
Proceeds from revolving credit facility     195,000             195,000  
Repayment of revolving credit facility     (70,000 )           (70,000 )
(Repayment of) proceeds from senior notes and other loans, net     (2,490 )   (1,656 )   4,592     446  
Payment of deferred financing fees     (8 )           (8 )
(Increase) decrease in intercompany receivables, net     (85,712 )   52,846     32,866      
Other financing activities, net     1,489     (81 )   (616 )   792  
   
 
 
 
 
  Net cash provided by financing activities     38,279     51,109     36,842     126,230  
   
 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     897     (7,513 )   477     (6,139 )
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD     62     7,558     13,234     20,854  
Effect of currency exchange rate changes on cash             (1,053