UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2004

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from                    to                    

 

Commission File Number 001 - 32205

 

CB RICHARD ELLIS GROUP, 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)

 

 

 

865 South Figueroa Street, Suite 3400
Los Angeles, California

 

90017

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(213) 613-3226

 

 

(Registrant’s telephone number, including area code)

 

(Former name, former address and
former fiscal year if changed since last report)

 

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  No .

 

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

 

The number of shares of Class A common stock outstanding at July 30, 2004 was 69,299,920.

 

 



 

FORM 10-Q

 

June 30, 2004

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003

 

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 (Unaudited)

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (Unaudited)

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 2.

Changes in Securities and Use of Proceeds

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

Signatures

 

 

2



 

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

June 30,
2004

 

December 31,
2003

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

179,592

 

$

163,881

 

Restricted cash

 

12,044

 

14,899

 

Receivables, less allowance for doubtful accounts of $17,444 and $16,181 at June 30, 2004 and December 31, 2003, respectively

 

295,256

 

322,416

 

Warehouse receivable

 

219,935

 

230,790

 

Prepaid expenses

 

23,687

 

22,854

 

Deferred tax assets, net

 

67,786

 

57,681

 

Other current assets

 

35,655

 

26,461

 

Total Current Assets

 

833,955

 

838,982

 

Property and equipment, net

 

123,384

 

113,569

 

Goodwill

 

825,056

 

819,558

 

Other intangible assets, net of accumulated amortization of $84,759 and $73,449 at June 30, 2004 and December 31, 2003, respectively

 

121,238

 

131,731

 

Deferred compensation assets

 

79,094

 

76,389

 

Investments in and advances to unconsolidated subsidiaries

 

75,993

 

68,361

 

Deferred tax assets, net

 

35,442

 

32,179

 

Other assets, net

 

124,914

 

132,712

 

Total Assets

 

$

2,219,076

 

$

2,213,481

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

181,531

 

$

189,787

 

Compensation and employee benefits payable

 

146,660

 

148,874

 

Accrued bonus and profit sharing

 

126,503

 

200,343

 

Short-term borrowings:

 

 

 

 

 

Warehouse line of credit

 

219,935

 

230,790

 

Other

 

28,618

 

39,347

 

Total short-term borrowings

 

248,553

 

270,137

 

Current maturities of long-term debt

 

13,029

 

11,285

 

Other current liabilities

 

13,314

 

12,991

 

Total Current Liabilities

 

729,590

 

833,417

 

 

 

 

 

 

 

Long-Term Debt:

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount of $2,456 and $2,827 at June 30, 2004 and December 31, 2003, respectively

 

204,913

 

226,173

 

Senior secured term loan

 

268,200

 

287,500

 

9¾% senior notes

 

200,000

 

200,000

 

16% senior notes, net of unamortized discount of $2,516 and $2,844 at June 30, 2004 and December 31, 2003, respectively

 

35,800

 

35,472

 

Other long-term debt

 

43,437

 

42,275

 

Total Long-Term Debt

 

752,350

 

791,420

 

Deferred compensation liability

 

143,846

 

138,037

 

Pension liability

 

36,715

 

35,998

 

Other liabilities

 

95,215

 

75,024

 

Total Liabilities

 

1,757,716

 

1,873,896

 

Minority interest

 

8,163

 

6,656

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Class A common stock; $0.01 par value; 325,000,000 shares authorized; 68,973,443 and 7,561,499 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively

 

690

 

76

 

Class B common stock; $0.01 par value; 100,000,000 shares authorized; 53,409,556 shares issued and outstanding at December 31, 2003; no shares authorized, issued or outstanding at June 30, 2004

 

 

534

 

Additional paid-in capital

 

498,904

 

361,522

 

Notes receivable from sale of stock

 

(5,350

)

(4,680

)

Accumulated (deficit) earnings

 

(12,154

)

1,449

 

Accumulated other comprehensive loss

 

(26,581

)

(23,780

)

Treasury stock at cost, 405,883 and 385,103 shares at June 30, 2004 and December 31, 2003, respectively

 

(2,312

)

(2,192

)

Total Stockholders’ Equity

 

453,197

 

332,929

 

Total Liabilities and Stockholders’ Equity

 

$

2,219,076

 

$

2,213,481

 

 

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

 

3



 

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

550,916

 

$

321,717

 

$

991,908

 

$

585,441

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

272,611

 

153,066

 

496,833

 

276,665

 

Operating, administrative and other

 

230,539

 

137,421

 

429,790

 

263,596

 

Depreciation and amortization

 

10,830

 

6,329

 

27,661

 

12,500

 

Merger-related charges

 

11,574

 

3,310

 

21,534

 

3,310

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

25,362

 

21,591

 

16,090

 

29,370

 

Equity income from unconsolidated subsidiaries

 

2,768

 

3,801

 

5,294

 

6,864

 

Interest income

 

1,950

 

701

 

4,257

 

1,776

 

Interest expense

 

23,175

 

16,940

 

43,854

 

31,264

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision (benefit) for income taxes

 

6,905

 

9,153

 

(18,213

)

6,746

 

Provision (benefit) for income taxes

 

3,940

 

3,981

 

(4,610

)

2,921

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,965

 

$

5,172

 

$

(13,603

)

$

3,825

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.05

 

$

0.12

 

$

(0.22

)

$

0.09

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for basic income (loss) per share

 

63,990,494

 

41,683,699

 

63,256,275

 

41,667,644

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share

 

$

0.04

 

$

0.12

 

$

(0.22

)

$

0.09

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for diluted income (loss) per share

 

69,375,929

 

42,523,893

 

63,256,275

 

42,462,801

 

 

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

 

4



 

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net (loss) income

 

$

(13,603

)

$

3,825

 

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

27,661

 

12,500

 

Amortization and write-off of deferred financing costs

 

3,533

 

1,793

 

Amortization and write-off of long-term debt discount

 

699

 

247

 

Deferred compensation deferrals

 

8,712

 

4,336

 

Gain on sale of servicing rights and other assets

 

(2,396

)

(1,874

)

Equity income from unconsolidated subsidiaries

 

(5,294

)

(6,864

)

Provision for doubtful accounts

 

2,759

 

1,905

 

Deferred income tax benefit

 

(4,609

)

(106

)

Decrease in receivables

 

16,165

 

9,113

 

Increase in deferred compensation assets

 

(2,705

)

(5,892

)

Decrease (increase) in prepaid expenses and other assets

 

13,652

 

(7,210

)

Decrease in compensation and employee benefits payable and accrued bonus and profit sharing

 

(73,018

)

(59,651

)

Decease in accounts payable and accrued expenses

 

(16,132

)

(14,864

)

Decrease in income tax payable

 

(5,769

)

(17,540

)

Increase in other liabilities

 

8,900

 

4,639

 

Other operating activities, net

 

2,350

 

1,088

 

Net cash used in operating activities

 

(39,095

)

(74,555

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures, net of concessions received

 

(22,134

)

(1,171

)

Acquisition of businesses including net assets acquired, intangibles and goodwill, net of cash acquired

 

(4,957

)

1,343

 

Other investing activities, net

 

1,417

 

2,224

 

Net cash (used in) provided by investing activities

 

(25,674

)

2,396

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from revolver and swingline credit facility

 

186,750

 

140,600

 

Repayment of revolver and swingline credit facility

 

(186,750

)

(129,350

)

Repayment of senior secured term loan

 

(17,500

)

(4,675

)

(Repayment of) proceeds from euro cash pool loan and other loans, net

 

(10,815

)

7,330

 

Repayment of 11¼% senior notes

 

(21,631

)

 

Proceeds from issuance of common stock, initial public offering, net

 

135,000

 

 

Other financing activities, net

 

(2,367

)

266

 

Net cash provided by financing activities

 

82,687

 

14,171

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

17,918

 

(57,988

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

163,881

 

79,701

 

Effect of currency exchange rate changes on cash

 

(2,207

)

1,305

 

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

179,592

 

$

23,018

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest, net of amount capitalized

 

$

44,440

 

$

26,570

 

Income taxes, net of refunds

 

$

6,685

 

$

19,535

 

 

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

 

5



 

CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Nature of Operations

 

CB Richard Ellis Group, Inc., formerly known as CBRE Holding, Inc. (which may be referred to in this Form 10-Q as “we,” “us,” and “our”), offers a full range of services to occupiers, owners, lenders and investors in office, retail, industrial, multi-family and other commercial real estate markets globally under the “CB Richard Ellis” brand name. Our business is focused on several service competencies, including strategic advice and execution assistance for property leasing and sales; property valuations; commercial mortgage origination and servicing, facilities and property management; real estate investment management and real estate econometric forecasting. We generate revenues both on a per project or transaction basis and from annual management fees.

 

CB Richard Ellis Group, Inc. was incorporated on February 20, 2001 and was 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, we were a wholly owned subsidiary of Blum Strategic Partners, L.P., which is an affiliate of Richard C. Blum, a director of CBRE and our company.

 

On July 20, 2001, we acquired all of the outstanding stock of CBRE pursuant to an Amended and Restated Agreement and Plan of Merger, dated May 31, 2001, among CBRE, Blum CB Corp. (Blum CB) and us. Blum CB was merged with and into CBRE with CBRE being the surviving corporation (the 2001 Merger). On July 23, 2003, our global position in the commercial real estate services industry was further solidified as CBRE acquired Insignia Financial Group, Inc.

 

2.              Initial Public Offering

 

On June 15, 2004, we completed the initial public offering of shares of our Class A common stock (the IPO).  In connection with the IPO, we issued and sold 7,726,764 shares of our Class A common stock and received aggregate net proceeds of approximately $135.0 million, after deducting underwriting discounts and commissions and offering expenses payable by us.  Also in connection with the IPO, selling stockholders sold an aggregate of 16,273,236 shares of our Class A common stock and received net proceeds of approximately $290.6 million, after deducting underwriting discounts and commissions.  We did not receive any of the proceeds from the sale of shares by the selling stockholders.

 

3.              Insignia Acquisition

 

On July 23, 2003, pursuant to an Amended and Restated Agreement and Plan of Merger, dated May 28, 2003 (the Insignia Acquisition Agreement), by and among us, CBRE, Apple Acquisition Corp. (Apple Acquisition), a Delaware corporation and wholly owned subsidiary of CBRE, and Insignia Financial Group, Inc. (Insignia), Apple Acquisition was merged with and into Insignia (the Insignia Acquisition). Insignia was the surviving corporation in the Insignia Acquisition and at the effective time of the Insignia Acquisition became a wholly owned subsidiary of CBRE.

 

The aggregate preliminary purchase price for the acquisition of Insignia was approximately $329.1 million, which includes: (1) $267.9 million in cash paid for shares of Insignia’s outstanding common stock, at $11.156 per share, (2) $38.2 million in cash paid for Insignia’s outstanding Series A preferred stock and Series B preferred stock at $100.00 per share plus accrued and unpaid dividends, (3) cash payments of $7.9 million to holders of Insignia’s vested and unvested warrants and options and (4) $15.1 million of direct costs incurred in connection with the acquisition, consisting mostly of legal and accounting fees.

 

The preliminary purchase accounting adjustments related to the Insignia Acquisition have been recorded in the accompanying consolidated financial statements as of, and for periods subsequent to, July 23, 2003. Given the size and complexity of the acquisition, the fair valuation of certain assets is still preliminary.  Accordingly, the final valuation of the net assets acquired is expected to be completed during the third quarter of 2004.  Additionally, adjustment to the estimated liabilities assumed in connection with the Insignia Acquisition may still be required.

 

6



 

During the six months ended June 30, 2004, we made the following significant adjustments to goodwill:

 

                  In the first quarter of 2004, we assigned a $6.6 million estimated fair value to a broker draw asset acquired from Insignia. Based on our management’s estimates, we generally derive benefit from brokers participating in our draw program over two years. Accordingly, we estimate that we will derive benefit from the broker draw asset related to Insignia’s brokers over two years from the date of the Insignia Acquisition and, accordingly, we are amortizing it on a straight-line basis, which reflects the pattern in which the economic benefits of the broker draw asset are consumed, during that period. The allocation of purchase price to the broker draw asset, net of related tax impact, resulted in a $3.8 million decrease in goodwill and a related $1.9 million increase in net loss during the six months ended June 30, 2004, which includes a $0.8 million adjustment to correct the amortization taken for the period from the date of the Insignia Acquisition through December 31, 2003.

 

                  During the six months ended June 30, 2004, we recorded a $15.4 million increase to goodwill due to an increase in liabilities primarily related to additional lease termination costs, contract termination costs and severance payments in excess of amounts previously accrued. All such adjustments were recorded in accordance with the requirements of Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” As of the consummation date of the acquisition of Insignia, our management began to assess and formulate a plan to close certain Insignia locations.  Due to the size of this acquisition and the dispersed nature of Insignia’s operations, a significant amount of time and effort was required to finalize plans with respect to closures, analyze the provisions of contracts to be terminated and estimate the total exit costs. The adjustment during the six months ended June 30, 2004 represents a change in estimate as we completed our assessments and finalized our plans with respect to certain of the locations. Consistent with the requirements of EITF Issue No. 95-3, finalization of our plans for all Insignia closures will be completed within one year of the consummation date of the acquisition.

 

                  In the first quarter of 2004, we recorded a $4.2 million increase to goodwill related to the sale of certain assets acquired in connection with the Insignia Acquisition. Of this amount, $3.7 million represented a receivable due from a buyer, which was relieved in the second quarter of 2004 as cash was received in May 2004 and applied to the balance.  During the second quarter of 2004, we received additional cash for the sale of such assets as well as finalized the fair value assigned to such assets in the purchase price allocation.  This resulted in a overall increase to goodwill of approximately $2.6 million, which reflects the sale of assets at an amount less than the value assigned in the preliminary purchase price allocation. As no event occurred during the period from the acquisition date to the sale date that would have impacted the value of these assets, our management concluded that the amount at which these assets were ultimately sold represents the best estimate of the value of these assets at the date of the Insignia Acquisition.

 

                  During the second quarter of 2004, we finalized the fair value of liabilities assumed relating to annuities to former equity partners of Richard Ellis that are payable by Insignia until the times of their deaths.  Our valuations of these annuities was based in part on a third-party valuation and resulted in a $4.2 million increase in goodwill in 2004.

 

                  During the six months ended June 30, 2004, we recorded a reduction of $15.0 million to goodwill related to the deferred tax impact of all purchase accounting adjustments recorded in 2004, excluding the deferred tax impact previously mentioned related to the broker draw asset.

 

7



 

The Insignia Acquisition gave rise to the consolidation and elimination of some Insignia duplicate facilities and Insignia redundant employees as well as the termination of certain contracts as a result of a change of control of Insignia. As a result, we have accrued certain liabilities in accordance with EITF Issue No. 95-3. These liabilities assumed in connection with the Insignia Acquisition consist of the following (dollars in thousands):

 

 

 

2003 Charge
To Goodwill

 

2004
Adjustments

 

Utilized To Date

 

To be Utilized

 

Severance

 

$

30,706

 

$

524

 

$

(15,708

)

$

15,522

 

Lease termination costs

 

28,922

 

12,705

 

(7,135

)

34,492

 

Change of control payments

 

10,451

 

 

(10,451

)

 

Costs associated with exiting contracts

 

8,921

 

1,379

 

(8,862

)

1,438

 

Legal settlements anticipated

 

8,739

 

800

 

(3,032

)

6,507

 

 

 

$

87,739

 

$

15,408

 

$

(45,188

)

$

57,959

 

 

4.              Basis of Presentation

 

The consolidated statements of operations and cash flows for the three and six months ended June 30, 2004 include full periods of activity for Insignia. However, the consolidated statements of operations and cash flows for the three and six months ended June 30, 2003 do not include any activity of Insignia, as the Insignia Acquisition occurred on July 23, 2003. As such, our consolidated financial statements after the Insignia Acquisition are not directly comparable to our consolidated financial statements prior to the Insignia Acquisition.

 

Pro forma results for the three and six months ended June 30, 2003, assuming the Insignia Acquisition had occurred as of January 1, 2003, are presented below.  These pro forma results have been prepared for comparative purposes only and include adjustments, such as increased amortization expense as a result of intangible assets acquired in the Insignia Acquisition, as well as higher interest expense as a result of debt incurred to finance the Insignia Acquisition.  These pro forma results do not purport to be indicative of what operating results would have been had the Insignia Acquisition occurred on January 1, 2003, and may not be indicative of future operating results (dollars in thousands, except share data).

 

 

 

June 30, 2003

 

 

 

Three Months
Ended

 

Six Months
Ended

 

 

 

 

 

 

 

Revenue

 

$

471,942

 

$

865,566

 

Operating income (loss)

 

$

11,872

 

$

(27,206

)

Net loss

 

$

(5,460

)

$

(37,211

)

Basic and diluted loss per share

 

$

(0.09

)

$

(0.60

)

 

The accompanying consolidated financial statements have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ materially from those estimates. All significant inter-company transactions and balances have been eliminated, and certain reclassifications have been made to prior periods’ consolidated financial statements to conform with the current period presentation. The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2004. The consolidated financial statements and notes to consolidated financial statements should be read in conjunction with our 2003 Annual Report on Form 10-K/A, which contains the latest

 

8



 

available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2003.

 

On May 4, 2004, we amended our Certificate of Incorporation increasing the authorized shares of Class A common stock to 325,000,000 and the authorized shares of Class B common stock to 100,000,000.  Also, on May 4, 2004, we effected a three-for-one split of our outstanding Class A common stock and Class B common stock, which split was effected by a stock dividend.  In addition, on June 7, 2004, we effected a 1-for-1.0825 reverse stock split of our outstanding Class A common stock and Class B common stock.  The applicable share and per share data for all periods included herein have been restated to give effect to these stock splits.  In connection with the completion of the IPO, all outstanding shares of Class B common stock were converted into an equal number of shares of Class A common stock.  On June 16, 2004, we amended our Certificate of Incorporation to eliminate the authorized shares of Class B common stock.

 

5.              Stock-Based Compensation

 

Prior to the fourth quarter of 2003, we accounted for our employee stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related Financial Accounting Standards Board (FASB) interpretations.  Accordingly, compensation cost for employee stock options was measured as the excess, if any, of the estimated market price of our Class A common stock at the date of grant over the amount an employee was required to pay to acquire the stock.

 

During the fourth quarter of 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” prospectively to all employee awards granted, modified or settled after January 1, 2003, as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123.”

 

In accordance with SFAS No. 123, we estimate the fair value of our options using the Black-Scholes option-pricing model, which takes into account assumptions such as the dividend yield, the risk-free interest rate, the expected stock price volatility and the expected life of the options.  As our Class A common stock was not freely tradeable on a national securities exchange or an over-the-counter market prior to the completion of the IPO, an effectively zero percent volatility was utilized for all periods ending prior to the IPO.  The dividend yield is excluded from the calculation, as it is our present intention to retain all earnings.  The following table illustrates the effect on net income (loss) and income (loss) per share if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except share data):

 

9



 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) as reported

 

$

2,965

 

$

5,172

 

$

(13,603

)

$

3,825

 

Add:  Stock-based employee compensation  expense included in reported net income (loss), net of the related tax effect

 

53

 

 

106

 

 

Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards, net of the related tax effect

 

(190

)

(147

)

(387

)

(293

)

Pro forma net income (loss)

 

$

2,828

 

$

5,025

 

$

(13,884

)

$

3,532

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.05

 

$

0.12

 

$

(0.22

)

$

0.09

 

Pro forma

 

$

0.04

 

$

0.12

 

$

(0.22

)

$

0.08

 

Diluted income (loss) per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.04

 

$

0.12

 

$

(0.22

)

$

0.09

 

Pro forma

 

$

0.04

 

$

0.12

 

$

(0.22

)

$

0.08

 

 

The weighted average fair value of options granted by us was $8.84 and $1.15 for the three months ended June 30, 2004 and 2003, respectively, and $5.62 and $1.58 for the six months ended June 30, 2004 and 2003, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, utilizing the following weighted average assumptions:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

3.92

%

2.37

%

3.58

%

2.98

%

Expected volatility

 

50.00

%

0.00

%

30.00

%

0.00

%

Expected life

 

5 years

 

5 years

 

5 years

 

5 years

 

 

Option valuation models require the input of subjective assumptions including the expected stock price volatility.  Because our 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, we do not believe that the Black-Scholes model necessarily provides a reliable single measure of the fair value of our employee stock options.

 

6.              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 we 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:  This balance includes cash and cash equivalents with maturities of less than three months.  The carrying amount approximates fair value due to the short-term maturities of these instruments.

 

10



 

Short-Term Borrowings:  The majority of this balance represents the warehouse line of credit.  Due to their short-term maturities and variable interest rates, fair value approximates carrying value  (See Note 10).

 

11¼% Senior Subordinated Notes:  Based on dealers’ quotes, the estimated fair value of the 11¼% senior subordinated notes is $236.4 million and $256.5 million at June 30, 2004 and December 31, 2003, respectively.  Their actual carrying value totaled $204.9 million and $226.2 million at June 30, 2004 and December 31, 2003, respectively (See Note 10).

 

9¾% Senior Notes:  Based on dealers’ quotes, the estimated fair value of the 9¾% senior notes is $220.0 million and $222.0 million at June 30, 2004 and December 31, 2003, respectively.  Their actual carrying value totaled $200.0 million at June 30, 2004 and December 31, 2003 (See Note 10).

 

16% Senior Notes:  During the six months ended June 30, 2004, we were not aware of any trading activity for the 16% senior notes due 2011, and no dealer’s quote was available.  Their carrying value totaled $35.8 million and $35.5 million at June 30, 2004 and December 31, 2003, respectively (see Note 10).

 

Senior Secured Terms Loans & Other Long-Term Debt:  Estimated fair values approximate respective carrying values because a substantial majority of these instruments are based on variable interest rates (see Note 10).

 

7.              Restricted Cash

 

Included in the accompanying consolidated balance sheets as of June 30, 2004 and December 31, 2003, is restricted cash of $12.0 million and $14.9 million, respectively, which primarily consists of cash pledged to secure the guarantee of certain short-term notes issued in connection with previous acquisitions by Insignia in the United Kingdom (U.K.).  The acquisitions include the 1999 acquisition of St. Quintin Holdings Limited and the 1998 acquisition of Richard Ellis Group Limited.

 

8.              Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for us and each of our segments (See Note 18 for a description of our segments) for the six months ended June 30, 2004 are as follows (dollars in thousands):

 

 

 

Americas

 

EMEA

 

Asia Pacific

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2004

 

$

598,439

 

$

217,106

 

$

4,013

 

$

819,558

 

Purchase accounting adjustments related to acquisitions

 

711

 

3,993

 

794

 

5,498

 

Balance at June 30, 2004

 

$

599,150

 

$

221,099

 

$

4,807

 

$

825,056

 

 

 

11



 

Other intangible assets totaled $121.2 million and $131.7 million, net of accumulated amortization of $84.8 million and $73.4 million, as of June 30, 2004 and December 31, 2003, respectively, and are comprised of the following (dollars in thousands):

 

 

 

As of June 30, 2004

 

As of December 31, 2003

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

 

 

 

 

 

 

 

 

 

 

Unamortizable intangible assets

 

 

 

 

 

 

 

 

 

Trademarks

 

$

63,700

 

 

 

$

63,700

 

 

 

Trade name

 

19,826

 

 

 

19,826

 

 

 

 

 

$

83,526

 

 

 

$

83,526

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets

 

 

 

 

 

 

 

 

 

Backlog

 

$

72,503

 

$

(66,825

)

$

72,503

 

$

(59,108

)

Management contracts

 

25,690

 

(11,434

)

25,649

 

(9,708

)

Loan servicing rights

 

18,470

 

(4,748

)

17,694

 

(3,812

)

Other

 

5,808

 

(1,752

)

5,808

 

(821

)

 

 

$

122,471

 

$

(84,759

)

$

121,654

 

$

(73,449

)

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

205,997

 

$

(84,759

)

$

205,180

 

$

(73,449

)

 

In accordance with SFAS No. 141, “Business Combinations,” trademarks of $63.7 million were separately identified as a result of the 2001 Merger. As a result of the Insignia Acquisition, a $19.8 million trade name was separately identified, which represents the Richard Ellis trade name in the U.K. that was owned by Insignia prior to the Insignia Acquisition. Both the trademarks and the trade name have indefinite useful lives and accordingly are not being amortized.

 

Backlog represents the fair value of Insignia’s net revenue backlog as of July 23, 2003, which was acquired as part of the Insignia Acquisition. The backlog consists of the net commissions receivable on Insignia’s revenue producing transactions, which were at various stages of completion prior to the Insignia Acquisition. This intangible asset is being amortized as cash is received or upon final closing of these pending transactions.

 

Management contracts are primarily comprised of property management contracts in the United States (U.S.), the U.K., France and other European operations, as well as valuation services and fund management contracts in the U.K. These management contracts are being amortized over estimated useful lives of up to ten years.

 

Loan servicing rights represent the fair value of servicing assets in our mortgage banking line of business in the U.S., the majority of which were acquired as part of the 2001 Merger. The loan servicing rights are being amortized over estimated useful lives of up to ten years.

 

Other amortizable intangible assets represent other intangible assets acquired as a result of the Insignia Acquisition including an intangible asset recognized for other non-contractual revenue acquired in the U.S. as well as franchise agreements and a trade name in France. These other intangible assets are being amortized over estimated useful lives of up to 20 years.

 

Amortization expense related to intangible assets was $2.7 million and $0.9 million for the three months ended June 30, 2004 and 2003, respectively, and $11.3 million and $1.9 million for the six months ended June 30, 2004 and 2003, respectively. The estimated annual amortization expense for each of the years ended December 31, 2004 through December 31, 2008 approximates $20.6 million, $6.6 million, $5.2 million, $4.4 million and $3.7 million, respectively.

 

12



 

9.              Investments in and Advances to Unconsolidated Subsidiaries

 

Investments in and advances to unconsolidated subsidiaries are accounted for under the equity method of accounting. Combined condensed financial information for these entities is as follows (dollars in thousands):

 

Condensed Balance Sheets Information:

 

 

 

June 30,
2004

 

December 31,
2003

 

Current assets

 

$

247,212

 

$

208,743

 

Non current assets

 

$

2,552,388

 

$

2,040,138

 

Current liabilities

 

$

173,614

 

$

154,778

 

Non current liabilities

 

$

1,218,973

 

$

969,993

 

Minority interest

 

$

5,838

 

$

4,600

 

 

Condensed Statements of Operations Information:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

115,755

 

$

103,782

 

$

236,334

 

$

202,813

 

Operating income

 

$

31,647

 

$

32,146

 

$

55,535

 

$

55,750

 

Net income

 

$

39,915

 

$

26,711

 

$

74,099

 

$

47,787

 

 

Our investment management business involves investing our own capital in certain real estate investments with clients. We have provided investment management, property management, brokerage and other professional services to these equity investees.

 

10.       Debt

 

Since 2001, we have maintained a credit agreement with Credit Suisse First Boston (CSFB) and other lenders to fund strategic acquisitions and to provide for our working capital needs.  On April 23, 2004, we entered into an amendment to our previously amended and restated credit agreement that included a waiver generally permitting us to prepay, redeem, repurchase or otherwise retire up to $30.0 million of our existing indebtedness and provided for the refinancing of all outstanding amounts under our previous credit agreement as well as the amendment and restatement of our credit agreement upon the completion of our initial public offering.  On June 15, 2004, in connection with the completion of our IPO, we completed a refinancing of all amounts outstanding under our amended and restated credit agreement and entered into a new amended and restated credit agreement (the Credit Agreement), which became effective in connection with such refinancing.

 

Our Credit Agreement permits us, among other things, to use the net proceeds received from our IPO to pay down debt, including the redemption of all $38.3 million in aggregate principal amount of our 16% senior notes due 2011 and $70.0 million in aggregate principal amount of our 9¾% senior notes due 2010, and the prepayment of $15.0 million in principal amount of our term loan under our Credit Agreement, which prepayment occurred on June 15, 2004 (See Note 19 for additional information on the use of the net proceeds from our IPO).

 

Our Credit Agreement includes the following:  (1) a term loan facility of $295.0 million, requiring quarterly principal payments of $2.95 million through December 31, 2009 with the balance payable on March 31, 2010; and (2) a $150.0 million revolving credit facility, including revolving credit loans, letters of credit and a swingline loan facility, all maturing on March 31, 2009.  Our Credit Agreement also permits us to increase the term facility by up to $25.0 million, subject to the satisfaction of customary conditions.

 

13



 

Borrowings under the term loan facility bear interest at varying rates based, at our option, on either LIBOR plus 2.25% to 2.50% or the alternate base rate plus 1.25% to 1.50%, in both cases as determined by reference to the credit rating assigned to the term facility by Moody’s Investors Service and Standard & Poor’s.  The potential increase of up to $25.0 million for the term loan facility would bear interest either at the same rate as described in the immediately preceding sentence or, in some circumstances as described in the Credit Agreement, at a higher or lower rate.  The total amount outstanding under the term loan facility included in senior secured term loan and current maturities of long-term debt in the accompanying consolidated balance sheets was $280.0 million and $297.5 million as of June 30, 2004 and December 31, 2003, respectively.

 

Borrowings under the revolving credit facility bear interest at varying rates based at our option, on either the applicable LIBOR plus 2.00% to 2.50% or the alternate base rate plus 1.00% to 1.50%, in both cases as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement).  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.  We repaid our revolving credit facility as of June 30, 2004 and at December 31, 2003 we had no revolving credit principal outstanding.

 

Borrowings under the prior credit agreements and our current Credit Agreement have been, and continue to be, jointly and severally guaranteed by us and substantially all of our domestic subsidiaries and are secured by a pledge of substantially all of our assets. Additionally, the prior credit agreements required, and our current Credit Agreement continues to require, us to pay a fee based on the total amount of the unused revolving credit facility commitment.

 

In May 2003, in connection with the Insignia Acquisition, CBRE Escrow, Inc. (CBRE Escrow), a wholly owned subsidiary of CBRE, issued $200.0 million in aggregate principal amount of 9¾% senior notes, which are due May 15, 2010. CBRE Escrow merged with and into CBRE, and CBRE assumed all obligations with respect to the 9¾% senior notes in connection with the Insignia Acquisition.  The 9¾% senior notes are unsecured obligations of CBRE, senior to all of its current and future unsecured indebtedness, but subordinated to all of CBRE’s current and future secured indebtedness. The 9¾% senior notes are jointly and severally guaranteed on a senior basis by us and substantially all of our domestic subsidiaries. Interest accrues at a rate of 9¾% per year and is payable semi-annually in arrears on May 15 and November 15. The 9¾% senior notes are redeemable at our option, in whole or in part, on or after May 15, 2007 at 104.875% of par on that date and at declining prices thereafter. In addition, before May 15, 2006, we are permitted to redeem up to 35.0% of the originally issued amount of the 9¾% senior notes at 109¾% 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 (as defined in the indenture governing our 9¾% senior notes), we are obligated to make an offer to purchase the 9¾% senior notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest. The amount of the 9¾% senior notes included in the accompanying consolidated balance sheets was $200.0 million as of June 30, 2004 and December 31, 2003.

 

In June 2001, in connection with the 2001 Merger, Blum CB issued $229.0 million in aggregate principal amount of 11¼% senior subordinated notes due June 15, 2011 for approximately $225.6 million, net of discount. CBRE assumed all obligations with respect to the 11¼% senior subordinated notes in connection with the 2001 Merger.  The 11¼% senior subordinated notes are unsecured senior subordinated obligations of CBRE and rank equally in right of payment with any of CBRE’s existing and future senior subordinated unsecured indebtedness but are subordinated to any of CBRE’s existing and future senior indebtedness.  The 11¼% senior subordinated notes are jointly and severally guaranteed on a senior subordinated basis by us and substantially all of our domestic subsidiaries. The 11¼% senior subordinated notes require semi-annual payments of interest in arrears on June 15 and December 15 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, which we did not do. In addition, before June 15, 2004, we were permitted to redeem up to 35.0% of the originally issued amount of the notes at 111¼% 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 (as defined in the indenture governing our 11¼% senior subordinated notes), we are obligated to make an offer to purchase the 11¼% senior subordinated notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest. In May and June 2004, we repurchased $21.6 million in aggregate principal amount of our 11¼% senior subordinated notes in the open market. We paid an aggregate of $3.1 million of premiums in connection with these

 

14



 

purchases. The amount of the 11¼% senior subordinated notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $204.9 million and $226.2 million as of June 30, 2004 and December 31, 2003, respectively.

 

Also in connection with the 2001 Merger, we issued $65.0 million in aggregate principal amount of 16% senior notes due July 20, 2011. The 16% senior notes are unsecured obligations, senior to all of our current and future unsecured indebtedness but subordinated to all of our current and future secured indebtedness. Interest accrues at a rate of 16.0% per year and is payable quarterly in arrears. Interest may be paid in kind to the extent our ability to pay cash dividends is restricted by the terms of our Credit Agreement. Additionally, interest in excess of 12.0% may, at our option, be paid in kind through July 2006. In the event of a change in control (as defined in the indenture governing our 16% senior notes), we are obligated to make an offer to purchase all of our outstanding 16% senior notes at 101.0% of par. In addition, under the terms of the indenture governing the 16% senior notes and subject to the restrictions set forth in the Credit Agreement, the notes are redeemable at our option, in whole or in part, at 116.0% of par commencing on July 20, 2001 and at declining prices thereafter. The amount of the 16% senior notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $35.8 million and $35.5 million as of June 30, 2004 and December 31, 2003, respectively.

 

Our Credit Agreement and the indentures governing our 16% senior notes, our 9¾% senior notes and our 11¼% senior subordinated notes each contain numerous restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or make distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, engage in transactions with affiliates, enter into sale/leaseback transactions, issue subsidiary equity and enter into consolidations or mergers. Our Credit Agreement also currently requires us to maintain a minimum coverage ratio of interest and certain fixed charges and a maximum leverage and senior secured leverage ratio of EBITDA (as defined in the Credit Agreement) to funded debt.

 

Since 2001, a joint venture that we consolidate has incurred non-recourse debt to acquire a real estate investment in Japan. The debt is secured by a mortgage on the acquired real estate asset.  During the second quarter of 2004, the joint venture elected to extend the short-term maturities of this debt to the existing long-term maturity date of July 31, 2008, as allowed under the provisions of the debt agreement.  In our accompanying consolidated balance sheets, this debt comprised $2.0 million of our other short-term borrowings at December 31, 2003, and comprised $42.6 million and $41.8 million of our other long-term debt as of June 30, 2004 and December 31, 2003, respectively.

 

We had short-term borrowings of $248.6 million and $270.1 million as of June 30, 2004 and December 31, 2003, respectively, both with a weighted average interest rate of 2.7%.

 

Our wholly owned subsidiary, L.J. Melody & Company (L.J. Melody), has a credit agreement with Residential Funding Corporation (RFC) for the purpose of funding mortgage loans that will be resold. On September 26, 2003, we entered into a Fourth Amended and Restated Warehousing Credit and Security Agreement. The agreement provides for a revolving line of credit of up to $200.0 million, bears interest at one-month LIBOR plus 1.0% and expires on August 31, 2004. By amendment on November 14, 2003, the agreement was modified to provide a revolving line of credit increase of $50.0 million that resulted in a total line of credit equaling $250.0 million, which expires on August 31, 2004.  On May 12, 2004, L.J. Melody further modified its credit agreement with RFC to provide a temporary revolving line of credit increase of $100.0 million that resulted in a total line of credit under the agreement equaling $350.0 million. This increase became effective on May 30, 2004 and expires 90 days after the effective date.

 

During the quarter ended June 30, 2004, we had a maximum of $219.9 million revolving line of credit principal outstanding with RFC. At June 30, 2004 and December 31, 2003 we had a $219.9 million and a $230.8 million warehouse line of credit outstanding, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets. Additionally, we had a $219.9 million and a $230.8 million of mortgage loans held for sale (warehouse receivable), which represented mortgage loans funded through the line of credit that, while committed to be purchased, had not yet been purchased as of June 30, 2004 and December 31, 2003, respectively, which are also included in the accompanying consolidated balance sheets.

 

15



 

In connection with our acquisition of Westmark Realty Advisors in 1995, we issued approximately $20.0 million in aggregate principal amount of senior notes. The Westmark senior notes are secured by letters of credit equal to approximately 50% of the outstanding balance at December 31, 2003. The Westmark senior notes are redeemable at the discretion of the note holders and have final maturity dates of June 30, 2008 and June 30, 2010. During the year ended December 31, 2002, all of the Westmark senior notes bore interest at 9.0%. On January 1, 2003, the interest rate on some of these notes was converted to varying rates equal to the interest rate in effect with respect to amounts outstanding under our Credit Agreement. On January 1, 2005, the interest rate on all of the other Westmark senior notes will be adjusted to equal the interest rate then in effect with respect to amounts outstanding under our Credit Agreement. The amount of the Westmark senior notes included in short-term borrowings in the accompanying consolidated balance sheets was $12.1 million as of June 30, 2004 and December 31, 2003.

 

Insignia, which we acquired in July 2003, issued loan notes as partial consideration for previous acquisitions of businesses in the U.K. The acquisition loan notes are payable to the sellers of the previously acquired U.K. businesses and are secured by restricted cash deposits in approximately the same amount. The acquisition loan notes are redeemable semi-annually at the discretion of the note holder and have a final maturity date of April 2010. As of June 30, 2004 and December 31, 2003, $10.1 million and $12.2 million of the acquisition loan notes were outstanding, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets.

 

A significant number of our subsidiaries in Europe have had a Euro cash pool loan since 2001, which is used to fund their short-term liquidity needs. The Euro cash pool loan is an overdraft line for our European operations issued by HSBC Bank. The Euro cash pool loan has no stated maturity date and bears interest at varying rates based on a base rate as defined by the bank plus 2.5%. The amount of the Euro cash pool loan included in short-term borrowings in the accompanying consolidated balance sheets was $5.4 million and $11.5 million at June 30, 2004 and December 31, 2003, respectively.

 

11.       Commitments and Contingencies

 

We are a party to a number of pending or threatened lawsuits arising out of, or incident to, our ordinary course of business. Our management believes that any liability imposed upon us that may result from disposition of these lawsuits will not have a material effect on our consolidated financial position or results of operations.

 

In connection with the sale of real estate investment assets by Insignia to Island Fund I LLC (Island) on July 23, 2003, Insignia agreed to maintain letter of credit support for real estate investment assets that were subject to the purchase agreement until the earlier of (1) the third anniversary of the completion of the sale, (2) the date on which the letter of credit is no longer required pursuant to the applicable real estate investment asset agreement or (3) the completion of a sale of the relevant underlying real estate investment asset. As of June 30, 2004, an aggregate of approximately $9.2 million of this letter of credit support remained outstanding under the purchase agreement. Also in connection with the sale, Insignia agreed to maintain a $1.3 million guarantee of a repayment obligation with respect to one of the real estate investment assets. Island agreed to reimburse us for 50% of any draws against these letters of credit or the repayment guarantee while they are outstanding and delivered a letter of credit to us in the amount of approximately $2.9 million as security for Island’s reimbursement obligation. As a result of this reimbursement obligation, we effectively retain potential liability for 50% of any future draws against these letters of credit and the repayment guarantee. However, there can be no assurance that Island will be able to reimburse us in the event of any draws against the letters of credit or the repayment guarantee or that Island’s future reimbursement obligations will not exceed the amount of the letter of credit provided to us by Island.

 

L.J. Melody previously executed an agreement with the Federal National Mortgage Association (Fannie Mae) to initially fund the purchase of a commercial mortgage loan portfolio using proceeds from its RFC line of credit. Subsequently, a 100% participation in the loan portfolio was sold to Fannie Mae and we retained the credit risk on the first 2% of losses incurred on the underlying portfolio of commercial mortgage loans. The current loan portfolio balance is $91.2 million and we have collateralized a portion of our obligations 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. The other 1% is covered in the form of a guarantee to Fannie Mae.

 

16



 

We had outstanding letters of credit totaling $23.2 million as of June 30, 2004, excluding letters of credit related to our subsidiaries’ outstanding indebtedness. Approximately $13.0 million of these letters of credit secure certain office leases and are outstanding pursuant to the revolving credit facility under our Credit Agreement and a reimbursement agreement with the Bank of Nova Scotia.  An additional $9.2 million of these letters of credit were issued pursuant to the terms of the purchase agreement with Island described above and are outstanding pursuant to the reimbursement agreement with the Bank of Nova Scotia. Under the agreement with the Bank of Nova Scotia, we may issue up to a maximum of approximately $11.0 million of letters of credit at any one time and these outstanding letters of credit are secured by the same assets of ours that secure our Credit Agreement. The remaining outstanding letter of credit is the Fannie Mae letter of credit described above, which was issued pursuant to a credit agreement with Wells Fargo Bank. Under this agreement, we may issue up to a maximum of  $8.0 million of letters of credit, and these outstanding letters of credit are secured by the same assets of ours that secure our Credit Agreement. The outstanding letters of credit as of June 30, 2004 expire at varying dates through March 31, 2005. However, we are obligated to renew the letters of credit related to certain office leases until as late as 2023, the letters of credit related to the Island purchase agreement until as late as July 23, 2006 and the Fannie Mae letter of credit until our obligation to cover potential credit losses is satisfied.

 

We had guarantees totaling $11.5 million as of June 30, 2004, which consisted primarily of guarantees of property debt as well as the obligations to Island and Fannie Mae discussed above. Approximately $4.8 million of the guarantees are related to investment activity that is scheduled to expire in October 2008. Approximately $3.4 million of guarantees are related to office leases in Europe and Asia. These guarantees will expire at the end of the lease terms. The guarantee obligation related to the agreement with Fannie Mae discussed above will expire in December 2004. The guarantee related to the Island purchase agreement will expire on the August 30, 2004 maturity date of the underlying loan agreement, unless such loan is renewed, modified or extended prior to such date to provide for a later maturity date. Renewals, modifications and extensions of such loan may be made without our consent, but the Insignia $1.3 million amount of our guarantee related to such loan may not be increased without our consent in connection with any such renewal, modification or extension.

 

An important part of the strategy for our investment management business involves investing our capital in certain real estate investments with our clients. As of June 30, 2004 we had committed $17.1 million to fund future co-investments. In addition to required future capital contributions, some of the co-investment entities may request additional capital from us and our subsidiaries holding investments in those assets and the failure to provide these contributions could have adverse consequences to our interests in these investments.

 

12.       Comprehensive Income (Loss)

 

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). In the accompanying consolidated balance sheets, accumulated other comprehensive loss consists of foreign currency translation adjustments and minimum pension liability adjustments. Foreign currency translation adjustments exclude any income tax effect given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time.

 

The following table provides a summary of comprehensive income (loss) (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,965

 

$

5,172

 

$

(13,603

)

$

3,825

 

Foreign currency translation gain (loss)

 

1,686

 

(3,395

)

(2,801

)

(3,274

)

Comprehensive income (loss)

 

$

4,651

 

$

1,777

 

$

(16,404

)

$

551

 

 

17



 

13.       Per Share Information

 

Basic income (loss) per share was computed by dividing the net income (loss) by the weighted average number of common shares outstanding of 63,990,494 and 41,683,699 for the three months ended June 30, 2004 and 2003, respectively, and 63,256,275 and 41,667,644 for the six months ended June 30, 2004 and 2003, respectively.

 

Diluted income per share for the three months ended June 30, 2004 included the dilutive effect of potential common shares of 5,385,435.  As a result of operating losses incurred for the six months ended June 30, 2004, dilutive weighted average shares outstanding did not give effect to potential common shares, as to do so would have been anti-dilutive. Dilutive income per share for the three and six months ended June 30, 2003 included the dilutive effect of potential common shares of 840,194 and 795,157, respectively.

 

14.       Fiduciary Funds

 

The accompanying consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which amounted to $714.8 million and $626.3 million at June 30, 2004 and December 31, 2003, respectively.

 

15.       Pensions

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,470

 

$

1,419

 

$

3,130

 

$

2,838

 

Interest cost

 

2,781

 

1,392

 

5,618

 

2,784

 

Expected return on plan assets

 

(3,123

)

(1,587

)

(6,307

)

(3,175

)

Amortization of prior service  costs

 

(53

)

 

(106

)

 

Amortization of unrecognized net gain

 

414

 

497

 

835

 

994

 

Net periodic pension cost

 

$

1,489

 

$

1,721

 

$

3,170

 

$

3,441

 

 

We contributed an additional $1.3 million and $2.3 million to fund our pension plan during the three and six months ended June 30, 2004.  We expect to contribute a total of $4.5 million to fund our pension plan for the year ended December 31, 2004.

 

18



 

16.       Merger-Related Charges

 

We recorded merger-related charges of $11.6 million and $21.5 million for the three and six months ended June 30, 2004 in connection with the Insignia Acquisition. These charges primarily related to the exit of facilities that were occupied by us prior to the Insignia Acquisition as well as the termination of employees, both of which became duplicative as a result of the Insignia Acquisition. We recorded charges for the exit of these facilities as premises were vacated and for redundant employees as these employees were severed, both in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Additionally, during the three and six months ended June 30, 2004, we recorded consulting costs, which represented fees paid to outside parties for nonrecurring services relating to the combination of Insignia’s financial systems and businesses with ours.  Our merger-related charges consisted of the following (dollars in thousands):

 

 

 

2003 Charge

 

2004
Adjustments

 

Utilized To
Date

 

To be Utilized

 

Lease termination costs

 

$

15,805

 

$

16,208

 

$

(3,522

)

$

28,491

 

Severance

 

7,042

 

2,061

 

(9,103

)

 

Change of control payments

 

6,525

 

 

(6,525

)

 

Consulting costs

 

2,738

 

1,527

 

(4,265

)

 

Other

 

4,707

 

1,738

 

(6,045

)

400

 

Total merger-related charges

 

$

36,817

 

$

21,534

 

$

(29,460

)

$

28,891

 

 

17.       Guarantor and Nonguarantor Financial Statements

 

The 9¾% senior notes are jointly and severally guaranteed on a senior basis by us and substantially all of our domestic subsidiaries. In addition, the 11¼% senior subordinated notes are jointly and severally guaranteed on a senior subordinated basis by us and substantially all of our domestic subsidiaries. (See Note 10 to the consolidated financial statements for additional information on the 9¾% senior notes and the 11¼% senior subordinated notes).

 

The following condensed consolidating financial information includes:

 

(1) Condensed consolidating balance sheets as of June 30, 2004 and December 31, 2003; condensed consolidating statements of operations for the three and six months ended June 30, 2004 and 2003; and condensed consolidating statements of cash flows for the six months ended June 30, 2004 and 2003, of (a) CB Richard Ellis Group as the parent, (b) CBRE as the subsidiary issuer, (c) the guarantor subsidiaries, (d) the nonguarantor subsidiaries and (e) CB Richard Ellis Group on a consolidated basis; and

 

(2) Elimination entries necessary to consolidate CB Richard Ellis Group as the parent, with CBRE and its guarantor and nonguarantor subsidiaries.

 

Investments in consolidated subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in consolidated subsidiaries and inter-company balances and transactions. The preliminary purchase accounting adjustments associated with the Insignia Acquisition have been recorded in the accompanying consolidated financial statements. The condensed consolidated balance sheets as of June 30, 2004 and December 31, 2003, reflect the allocation of goodwill based upon the estimated fair value of Insignia’s acquired reporting units (See Note 3 to the consolidated financial statements for additional information).

 

19



 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2004

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Elimination

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

817

 

$

1,764

 

$

147,018

 

$

29,993

 

$

 

$

179,592

 

Restricted cash

 

 

 

10,096

 

1,948

 

 

12,044

 

Receivables, less allowance for doubtful accounts

 

21

 

17

 

126,560

 

168,658

 

 

295,256

 

Warehouse receivable (a)

 

 

 

219,935

 

 

 

219,935

 

Prepaid expenses other current assets

 

80,838

 

926

 

21,228

 

24,136

 

 

127,128

 

Total Current Assets

 

81,676

 

2,707

 

524,837

 

224,735

 

 

833,955

 

Property and equipment, net

 

 

 

77,457

 

45,927

 

 

123,384

 

Goodwill

 

 

 

573,101

 

251,955

 

 

825,056

 

Other intangible assets, net

 

 

 

95,224

 

26,014

 

 

121,238

 

Deferred compensation assets

 

 

79,094

 

 

 

 

79,094

 

Investments in and advances to unconsolidated subsidiaries

 

 

5,261

 

55,725

 

15,007

 

 

75,993

 

Investments in consolidated subsidiaries

 

279,288

 

207,403

 

137,742

 

 

(624,433

)

 

Inter-company loan receivable

 

107,603

 

788,493

 

 

 

(896,096

)

 

Deferred tax assets, net

 

35,442

 

 

 

 

 

35,442

 

Other assets, net

 

2,225

 

31,708

 

33,601

 

57,380

 

 

124,914

 

Total Assets

 

$

506,234

 

$

1,114,666

 

$

1,497,687

 

$

621,018

 

$

(1,520,529

)

$

2,219,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,923

 

$

6,619

 

$

81,173

 

$

89,816

 

$

 

$

181,531

 

Inter-company payable

 

 

 

 

 

 

 

Compensation and employee benefits payable

 

 

 

95,733

 

50,927

 

 

146,660

 

Accrued bonus and profit sharing

 

 

 

58,081

 

68,422

 

 

126,503

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse line of credit (a)

 

 

 

219,935

 

 

 

219,935

 

Other

 

 

 

23,069

 

5,549

 

 

28,618

 

Total short-term borrowings

 

 

 

243,004

 

5,549

 

 

248,553

 

Current maturities of long-term debt

 

 

11,800

 

1,028

 

201

 

 

13,029

 

Other current liabilities

 

13,314

 

 

 

 

 

13,314

 

Total Current Liabilities

 

17,237

 

18,419

 

479,019

 

214,915

 

 

729,590

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount

 

 

204,913

 

 

 

 

204,913

 

Senior secured term loan

 

 

268,200

 

 

 

 

268,200

 

9¾% senior notes

 

 

200,000

 

 

 

 

200,000

 

16% senior notes, net of unamortized discount

 

35,800

 

 

 

 

 

35,800

 

Inter-company loan payable

 

 

 

750,695

 

145,401

 

(896,096

)

 

Other long-term debt

 

 

 

330

 

43,107

 

 

43,437

 

Total Long-Term Debt

 

35,800

 

673,113

 

751,025

 

188,508

 

(896,096

)

752,350

 

Deferred compensation liability

 

 

143,846

 

 

 

 

143,846

 

Other liabilities

 

 

 

60,240

 

71,690

 

 

131,930

 

Total Liabilities

 

53,037

 

835,378

 

1,290,284

 

475,113

 

(896,096

)

1,757,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

 

8,163

 

 

8,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

453,197

 

279,288

 

207,403

 

137,742

 

(624,433

)

453,197

 

Total Liabilities and Stockholders’ Equity

 

$

506,234

 

$

1,114,666

 

$

1,497,687

 

$

621,018

 

$

(1,520,529

)

$

2,219,076

 

 


(a)  Although L.J. Melody is included amongst our domestic subsidiaries, which jointly and severally guarantee both our 9¾% senior notes and 11¼% senior subordinated notes, all warehouse receivables funded under the RFC line of credit are pledged to RFC, and accordingly are not included as collateral for our other outstanding debt.

 

20



 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2003

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Elimination

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,008

 

$

17

 

$

148,752

 

$

12,104

 

$

 

$

163,881

 

Restricted cash

 

 

 

12,545

 

2,354

 

 

14,899

 

Receivables, less allowance for doubtful accounts

 

27

 

18

 

114,215

 

208,156

 

 

322,416

 

Warehouse receivable (a)

 

 

 

230,790

 

 

 

230,790

 

Prepaid expenses other current assets

 

63,557

 

42,151

 

18,957

 

22,998

 

(40,667

)

106,996

 

Total Current Assets

 

66,592

 

42,186

 

525,259

 

245,612

 

(40,667

)

838,982

 

Property and equipment, net

 

 

 

66,280

 

47,289

 

 

113,569

 

Goodwill

 

 

 

572,376

 

247,182

 

 

819,558

 

Other intangible assets, net

 

 

 

101,326

 

30,405

 

 

131,731

 

Deferred compensation assets

 

 

76,389

 

 

 

 

76,389

 

Investments in and advances to unconsolidated  subsidiaries

 

 

4,973

 

50,732

 

12,656

 

 

68,361

 

Investments in consolidated subsidiaries

 

321,451

 

252,399

 

199,393

 

 

(773,243

)

 

Inter-company loan receivable

 

 

787,009

 

 

 

(787,009

)

 

Deferred tax assets, net

 

32,179

 

 

 

 

 

32,179

 

Other assets, net

 

2,555

 

27,819

 

44,779

 

57,559

 

 

132,712

 

Total Assets

 

$

422,777

 

$

1,190,775

 

$

1,560,145

 

$

640,703

 

$

(1,600,919

)

$

2,213,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,187

 

$

7,614

 

$

64,392

 

$

116,594

 

$

 

$

189,787

 

Inter-company payable

 

40,667

 

 

 

 

(40,667

)

 

Compensation and employee benefits payable

 

 

 

98,160

 

50,714

 

 

148,874

 

Accrued bonus and profit sharing

 

 

 

112,365

 

87,978

 

 

200,343

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse line of credit (a)

 

 

 

230,790

 

 

 

230,790

 

Other

 

 

 

25,480

 

13,867

 

 

39,347

 

Total short-term borrowings

 

 

 

256,270

 

13,867

 

 

270,137

 

Current maturities of long-term debt

 

 

10,000

 

1,029

 

256

 

 

11,285

 

Other current liabilities

 

12,522

 

 

 

469

 

 

12,991

 

Total Current Liabilities

 

54,376

 

17,614

 

532,216

 

269,878

 

(40,667

)

833,417

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

11¼% senior subordinated notes, net of  unamortized discount

 

 

226,173

 

 

 

 

226,173

 

Senior secured term loan

 

 

287,500

 

 

 

 

287,500

 

9¾% senior notes

 

 

200,000

 

 

 

 

200,000

 

16% senior notes, net of unamortized discount

 

35,472

 

 

 

 

 

35,472

 

Inter-company loan payable

 

 

 

726,844

 

60,165

 

(787,009

)

 

Other long-term debt

 

 

 

330

 

41,945

 

 

42,275

 

Total Long-Term Debt

 

35,472

 

713,673

 

727,174

 

102,110

 

(787,009

)

791,420

 

Deferred compensation liability

 

 

138,037

 

 

 

 

138,037

 

Other liabilities

 

 

 

48,356

 

62,666

 

 

111,022

 

Total Liabilities

 

89,848

 

869,324

 

1,307,746

 

434,654

 

(827,676

)

1,873,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

 

6,656

 

 

6,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

332,929

 

321,451

 

252,399

 

199,393

 

(773,243

)

332,929

 

Total Liabilities and Stockholders’ Equity

 

$

422,777

 

$

1,190,775

 

$

1,560,145

 

$

640,703

 

$

(1,600,919

)

$

2,213,481

 

 


(a)  Although L.J. Melody is included amongst our domestic subsidiaries, which jointly and severally guarantee both our 9¾% senior notes and 11¼% senior subordinated notes, all warehouse receivables funded under the RFC line of credit are pledged to RFC, and accordingly are not included as collateral for our other outstanding debt.

 

21



 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2004

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Elimination

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

378,174

 

$

172,742

 

$

 

$

550,916

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

198,325

 

74,286

 

 

272,611

 

Operating, administrative and other

 

354

 

2,116

 

148,138

 

79,931

 

 

230,539

 

Depreciation and amortization

 

 

 

7,324

 

3,506

 

 

10,830

 

Merger-related charges

 

 

 

10,605

 

969

 

 

11,574

 

Operating (loss) income

 

(354

)

(2,116

)

13,782

 

14,050

 

 

25,362

 

Equity income (loss) from unconsolidated subsidiaries

 

 

82

 

2,815

 

(129

)

 

2,768

 

Interest income

 

34

 

12,878

 

560

 

1,338

 

(12,860

)

1,950

 

Interest expense

 

1,645

 

19,781

 

11,532

 

3,077

 

(12,860

)

23,175

 

Equity income from consolidated subsidiaries

 

3,599

 

9,304

 

5,509

 

 

(18,412

)

 

Income before (benefit) provision for income taxes

 

1,634

 

367

 

11,134

 

12,182

 

(18,412

)

6,905

 

(Benefit) provision for income taxes

 

(1,331

)

(3,232

)

1,830

 

6,673

 

 

3,940

 

Net income

 

$

2,965

 

$

3,599

 

$

9,304

 

$

5,509

 

$

(18,412

)

$

2,965

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2003

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Elimination

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

&