UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended March 31, 2006

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)

100 N. Sepulveda Boulevard, Suite 1050
El Segundo, California

90245

(Address of principal executive offices)

(Zip Code)

(310) 606-4700

 

(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 x  No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x                        Accelerated filer  o                    Non-accelerated filer  o

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

The number of shares of Class A common stock outstanding at April 28, 2006 was 74,311,957.

 




FORM 10-Q

March 31, 2006

TABLE OF CONTENTS

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2006 (Unaudited) and December 31, 2005

 

3

 

 

 

Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 (Unaudited)

 

4

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (Unaudited)

 

5

 

 

 

Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2006 (Unaudited)

 

6

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

 

Item 2.

 

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

 

30

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

48

 

Item 4.

 

Controls and Procedures

 

49

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

 

Legal Proceedings

 

50

 

Item 1A.

 

Risk Factors

 

50

 

Item 6.

 

Exhibits

 

50

 

Signatures

 

52

 

 

2




CB RICHARD ELLIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

 

 

  March 31,  

 

December 31,

 

 

 

2006

 

2005

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

253,089

 

 

 

$

449,289

 

 

Restricted cash

 

 

5,330

 

 

 

5,179

 

 

Receivables, less allowance for doubtful accounts of $15,665 and $15,646 at March 31, 2006 and December 31, 2005, respectively

 

 

427,399

 

 

 

483,175

 

 

Warehouse receivables

 

 

82,555

 

 

 

255,963

 

 

Prepaid expenses

 

 

52,986

 

 

 

36,402

 

 

Deferred tax assets, net

 

 

42,434

 

 

 

38,629

 

 

Other current assets

 

 

20,706

 

 

 

16,327

 

 

Total Current Assets

 

 

884,499

 

 

 

1,284,964

 

 

Property and equipment, net

 

 

152,915

 

 

 

137,655

 

 

Goodwill

 

 

886,374

 

 

 

880,179

 

 

Other intangible assets, net of accumulated amortization of $35,554 and $30,586 at March 31, 2006 and December 31, 2005, respectively

 

 

108,329

 

 

 

109,540

 

 

Deferred compensation assets

 

 

161,512

 

 

 

144,597

 

 

Investments in and advances to unconsolidated subsidiaries

 

 

100,391

 

 

 

106,153

 

 

Deferred tax assets, net

 

 

110,412

 

 

 

94,200

 

 

Other assets, net

 

 

81,347

 

 

 

58,384

 

 

Total Assets

 

 

$

2,485,779

 

 

 

$

2,815,672

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

$

203,025

 

 

 

$

254,085

 

 

Compensation and employee benefits payable

 

 

204,818

 

 

 

189,984

 

 

Accrued bonus and profit sharing

 

 

156,977

 

 

 

324,973

 

 

Income taxes payable

 

 

16,316

 

 

 

63,918

 

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

Warehouse lines of credit

 

 

82,555

 

 

 

255,963

 

 

Other

 

 

27,388

 

 

 

16,189

 

 

Total short-term borrowings

 

 

109,943

 

 

 

272,152

 

 

Current maturities of long-term debt

 

 

12,523

 

 

 

11,913

 

 

Other current liabilities

 

 

20,579

 

 

 

20,778

 

 

Total Current Liabilities

 

 

724,181

 

 

 

1,137,803

 

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount of $1,593 and $1,648 at March 31, 2006 and December 31, 2005, respectively

 

 

163,076

 

 

 

163,021

 

 

Senior secured term loan

 

 

250,500

 

 

 

253,450

 

 

9¾% senior notes

 

 

130,000

 

 

 

130,000

 

 

Other long-term debt

 

 

2,021

 

 

 

2,685

 

 

Total Long-Term Debt

 

 

545,597

 

 

 

549,156

 

 

Deferred compensation liability

 

 

183,464

 

 

 

172,871

 

 

Pension liability

 

 

41,621

 

 

 

41,194

 

 

Other liabilities

 

 

127,997

 

 

 

114,139

 

 

Total Liabilities

 

 

1,622,860

 

 

 

2,015,163

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Minority interest

 

 

18,060

 

 

 

6,824

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

Class A common stock; $0.01 par value; 325,000,000 shares authorized; 74,260,535 and 73,784,582 shares
issued and outstanding at March 31, 2006 and December 31, 2005, respectively

 

 

743

 

 

 

738

 

 

Additional paid-in capital

 

 

561,878

 

 

 

550,128

 

 

Notes receivable from sale of stock

 

 

(101

)

 

 

(101

)

 

Accumulated earnings

 

 

320,425

 

 

 

283,515

 

 

Accumulated other comprehensive loss

 

 

(38,086

)

 

 

(40,595

)

 

Total Stockholders’ Equity

 

 

844,859

 

 

 

793,685

 

 

Total Liabilities and Stockholders’ Equity

 

 

$

2,485,779

 

 

 

$

2,815,672

 

 

 

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 March 31,

 

 

 

2006

 

2005

 

Revenue

 

$

680,091

 

$

538,266

 

Costs and expenses:

 

 

 

 

 

Cost of services

 

340,445

 

268,046

 

Operating, administrative and other

 

265,161

 

223,221

 

Depreciation and amortization

 

14,930

 

10,370

 

Operating income

 

59,555

 

36,629

 

Equity income from unconsolidated subsidiaries

 

8,413

 

3,930

 

Minority interest expense

 

229

 

689

 

Interest income

 

3,590

 

2,445

 

Interest expense

 

13,935

 

13,598

 

Loss on extinguishment of debt

 

 

4,930

 

Income before provision for income taxes

 

57,394

 

23,787

 

Provision for income taxes

 

20,484

 

9,215

 

Net income

 

$

36,910

 

$

14,572

 

Basic income per share

 

$

0.49

 

$

0.20

 

Weighted average shares outstanding for basic income per share

 

75,186,507

 

73,532,843

 

Diluted income per share

 

$

0.48

 

$

0.19

 

Weighted average shares outstanding for diluted income per share

 

77,649,588

 

76,184,725

 

 

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)

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

36,910

 

$

14,572

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

14,930

 

10,370

 

Amortization and write-off of deferred financing costs

 

1,211

 

1,888

 

Amortization and write-off of long-term debt discount

 

55

 

352

 

Deferred compensation deferrals

 

7,364

 

7,413

 

Gain on sale of servicing rights and other assets

 

(698

)

(329

)

Equity income from unconsolidated subsidiaries

 

(8,413

)

(3,930

)

Distribution of earnings from unconsolidated subsidiaries

 

4,105

 

2,032

 

Minority interest expense

 

229

 

689

 

(Recovery of) provision for doubtful accounts

 

(362

)

371

 

Deferred income taxes

 

(7,967

)

(6,859

)

Compensation expense for stock options and non-vested stock awards

 

2,263

 

777

 

Incremental tax benefit from stock options exercised

 

(6,284

)

 

Tenant concessions received

 

2,394

 

517

 

Decrease in receivables

 

59,341

 

93,554

 

Increase in deferred compensation assets

 

(16,915

)

(8,513

)

Increase in prepaid expenses and other assets

 

(41,576

)

(4,828

)

Decrease in accounts payable and accrued expenses

 

(49,559

)

(16,496

)

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

 

(153,336

)

(139,303

)

(Decrease) increase in income taxes payable

 

(41,309

)

5,197

 

Increase (decrease) in other liabilities

 

12,983

 

(14,942

)

Other operating activities, net

 

(124

)

(177

)

Net cash used in operating activities

 

(184,758

)

(57,645

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(16,066

)

(7,144

)

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

 

(8,315

)

(41

)

Capital distributions from (contributions to) investments in unconsolidated subsidiaries, net

 

3,954

 

(7,403

)

Other investing activities, net

 

325

 

1,431

 

Net cash used in investing activities

 

(20,102

)

(13,157

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Repayment of senior secured term loans

 

(2,950

)

(2,950

)

Proceeds from (repayment of) Euro cash pool loan and other loans, net

 

1,281

 

(306

)

Repayment of 11¼% senior subordinated notes

 

 

(26,405

)

Proceeds from exercise of stock options

 

3,273

 

2,075

 

Incremental tax benefits from stock options exercised

 

6,284

 

 

Other financing activities, net

 

187

 

453

 

Net cash provided by (used in) financing activities

 

8,075

 

(27,133

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(196,785

)

(97,935

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

449,289

 

256,896

 

Effect of currency exchange rate changes on cash

 

585

 

(1,177

)

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

253,089

 

$

157,784

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

4,994

 

$

7,755

 

Income taxes, net of refunds

 

$

68,819

 

$

10,049

 

 

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

5




CB RICHARD ELLIS GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

Notes

 

 

 

Accumulated other
comprehensive loss

 

 

 

 

 

Shares

 

Class A
common
stock

 

Additional
paid-in
capital

 

receivable
from sale
of stock

 

Accumulated
earnings

 

Minimum
pension
liability

 

Foreign
currency
translation

 

Total

 

Balance at December 31, 2005

 

73,784,582

 

 

$

738

 

 

 

$

550,128

 

 

 

$

(101

)

 

 

$

283,515

 

 

 

$

(20,739

)

 

 

$

(19,856

)

 

$

793,685

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

36,910

 

 

 

 

 

 

 

 

36,910

 

Net cancellation and distribution of deferred compensation stock fund units

 

141,557

 

 

1

 

 

 

(58

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(57

)

Stock options exercised (including tax benefit)

 

334,996

 

 

4

 

 

 

9,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,549

 

Compensation expense for stock options and non-vested stock awards

 

 

 

 

 

 

2,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,263

 

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,509

 

 

2,509

 

Cancellation of non-vested stock awards 

 

(600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2006

 

74,260,535

 

 

$

743

 

 

 

$

561,878

 

 

 

$

(101

)

 

 

$

320,425

 

 

 

$

(20,739

)

 

 

$

(17,347

)

 

$

844,859

 

 

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

6




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.), a Delaware corporation (which may be referred to in this Quarterly Report on Form 10-Q as “we,” “us,” and “our”), 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 commercial real estate services firm. Prior to July 20, 2001, we were a wholly owned subsidiary of Blum Strategic Partners, L.P. (Blum Strategic), formerly known as RCBA 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). In July 2003, our global position in the commercial real estate services industry was further solidified as CBRE acquired Insignia Financial Group, Inc. (Insignia). 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, 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. We have no substantive operations other than our investment in CBRE.

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. On July 14, 2004, selling stockholders sold an additional 229,300 shares of our Class A common stock to cover over-allotments of shares by the underwriters and received net proceeds of approximately $4.1 million, after deducting underwriting discounts and commissions. Lastly, on December 13, 2004 and November 15, 2005, we completed secondary public offerings that provided further liquidity for some of our stockholders. We did not receive any of the proceeds from the sales of shares by the selling stockholders on June 15, 2004, July 14, 2004, December 13, 2004 and November 15, 2005.

We offer a full range of services to occupiers, owners, lenders and investors in office, retail, industrial, multi-family and other commercial real estate assets globally under the “CB Richard Ellis” brand name. Our business is focused on several service competencies, including tenant representation, property/agency leasing, property sales, commercial mortgage origination and servicing, integrated capital markets (equity and debt) solutions, commercial property and corporate facility management, valuation, proprietary research and real estate investment management. We generate revenues both on a per project or transaction basis and from annual management fees.

2.   Basis of Presentation

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

7




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2.   Basis of Presentation (Continued)

statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. 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 GAAP 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 to the current period presentation. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2006. The consolidated financial statements and notes to consolidated financial statements should be read in conjunction with our current Annual Report on Form 10-K, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2005.

3.   Stock-Based Compensation

Stock Incentive Plans

2001 Stock Incentive Plan.   Our 2001 stock incentive plan was adopted by our board of directors and approved by our stockholders on June 7, 2001. However, our 2001 stock incentive plan was terminated in June 2004 in connection with the adoption of our 2004 stock incentive plan, which is described below. The 2001 stock incentive plan permitted the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards to our employees, directors or independent contractors. Since our 2001 stock incentive plan has been terminated, no shares remain available for issuance under it. However, as of March 31, 2006, outstanding stock options granted under the 2001 stock incentive plan to acquire 3,305,933 shares of our Class A common stock remain outstanding according to their terms, and we will continue to issue shares to the extent required under the terms of such outstanding awards. Options granted under this plan have an exercise price of $5.77 and vest and are exercisable in 20% annual increments over five years from the date of grant. Options granted under the 2001 stock incentive plan are subject to a maximum term of ten years from the date of grant. The number of shares issued pursuant to the stock incentive plan, or pursuant to outstanding awards, is subject to adjustment on account of stock splits, stock dividends and other dilutive changes in our Class A common stock. In the event of a change of control of our company, all outstanding options will become fully vested and exercisable.

2004 Stock Incentive Plan.   Our 2004 stock incentive plan was adopted by our board of directors and approved by our stockholders on April 21, 2004. The 2004 stock incentive plan authorizes the grant of stock-based awards to our employees, directors and consultants. A total of 6,928,406 shares of our Class A common stock initially were reserved for issuance under the 2004 stock incentive plan. This share reserve is reduced by one share upon grant of an option or stock appreciation right, and is reduced by 2.25 shares upon issuance of stock pursuant to other stock-based awards. Awards that expire, terminate, lapse, that are reacquired by us or are redeemed for cash rather than shares will again be available for grant under the

8




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

3.   Stock-Based Compensation (Continued)

stock incentive plan. No employee is eligible to be granted options or stock appreciation rights covering more than 2,078,522 shares during any calendar year. In addition, our board of directors has adopted a policy stating that no person is eligible to be granted options, stock appreciation rights or restricted stock purchase rights covering more than 692,841 shares during any calendar year and to be granted any other form of stock award covering more than 346,240 shares during any calendar year. As of March 31, 2006, 2,150,087 shares were subject to options issued under our 2004 stock incentive plan and 3,877,307 shares remained available for future grants under the 2004 stock incentive plan. Options granted under this plan during 2004 have exercise prices in the range of $19.00 to $22.39 and vest and are exercisable generally in equal annual increments over three or four years from the date of grant. Options granted under this plan during 2005 have exercise prices in the range of $33.30 to $46.275 and vest and are also exercisable generally in equal annual increments over three or four years from the date of grant. All options previously granted under the 2004 stock incentive plan have had a term of five or seven years from the date of grant. The number of shares issued or reserved pursuant to the 2004 stock incentive plan, or pursuant to outstanding awards, is subject to adjustment on account of mergers, consolidations, reorganizations, stock splits, stock dividends and other dilutive changes in our common stock. In addition our board of directors may adjust outstanding awards to preserve the awards’ benefits or potential benefits.

A summary of the status of our option plans and warrants is presented in the tables below:

 

 

Shares

 

Weighted
Average 
Exercise 
Price

 

Exercisable
Shares

 

Weighted
Average
Exercise
Price

 

Outstanding at December 31, 2005

 

5,797,016

 

 

$

16.38

 

 

1,548,327

 

 

$

8.91

 

 

Exercised

 

(334,996

)

 

9.55

 

 

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

(6,000

)

 

46.28

 

 

 

 

 

 

 

 

Outstanding at March 31, 2006

 

5,456,020

 

 

$

16.75

 

 

1,298,265

 

 

$

8.87

 

 

 

Options outstanding at March 31, 2006 and their related weighted average exercise price, intrinsic value and life information is presented below:

 

 

Outstanding Options

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Exercisable Options

 

 

 

 

 

Average

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Remaining

 

Average

 

Aggregate

 

 

 

Average

 

Aggregate

 

 

 

Number

 

Contractual

 

Exercise

 

Intrinsic

 

Number

 

Exercise

 

Intrinsic

 

Exercise Prices

 

 

 

Outstanding

 

Life

 

Price

 

Value

 

Exercisable

 

Price

 

Value

 

$5.77

 

 

3,305,933

 

 

 

6.6

 

 

 

$

5.77

 

 

 

 

1,059,413

 

 

$

5.77

 

 

 

 

$19.00 – $22.39

 

 

1,096,554

 

 

 

3.5

 

 

 

22.33

 

 

 

 

231,451

 

 

22.21

 

 

 

 

$33.30 – $46.28

 

 

1,053,533

 

 

 

6.3

 

 

 

45.38

 

 

 

 

7,401

 

 

35.13

 

 

 

 

 

 

 

5,456,020

 

 

 

5.9

 

 

 

$

16.75

 

 

$

348,912,479

 

1,298,265

 

 

$

8.87

 

 

$

93,254,375

 

 

9




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

3.   Stock-Based Compensation (Continued)

Non-Vested Stock Awards.   Under our 2004 stock incentive plan, we have issued non-vested stock awards in our Class A common stock to certain of our employees and members of our Board of Directors. A summary of the status of our non-vested stock awards is presented in the table below:

 

 

Shares

 

Weighted
Average Market
Value Per Share

 

Balance at December 31, 2005

 

167,774

 

 

$

44.38

 

 

Granted

 

147,251

 

 

67.91

 

 

Vested

 

 

 

 

 

Forfeited

 

(600

)

 

46.28

 

 

Balance at March 31, 2006

 

314,425

 

 

$

55.40

 

 

 

Accounting for Stock-Based Compensation

Prior to 2003, we accounted for our employee stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board (APB) 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.

In 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.”  Awards under our stock-based compensation plans generally vest over three to five-year periods. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the three months ended March 31, 2006 and 2005 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.

In December 2004, the FASB issued SFAS No. 123 Revised, “Share Based Payment,” or SFAS No. 123R. SFAS No. 123R requires the measurement of compensation cost at the grant date, based upon the estimated fair value of the award, and requires amortization of the related expense over the employee’s requisite service period. Effective January 1, 2006, we adopted SFAS No. 123R applying the modified-prospective method for remaining unvested options that were granted subsequent to our IPO and the prospective method for remaining unvested options that were granted prior to our IPO.

The modified-prospective method provides for certain changes to the method for valuing share-based payment compensation, however prior periods are not required to be revised for comparative purposes. The valuation provisions of SFAS No. 123R apply to new awards as well as options that were granted subsequent to our IPO that are outstanding on the effective date and are subsequently modified or cancelled. As we have been accounting for our options under the fair value based method under SFAS

10




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

3.   Stock-Based Compensation (Continued)

No. 123 since the fourth quarter of 2003, the adoption of the modified-prospective method of SFAS No. 123R has not had a material impact on our financial position or results of operations.

We are applying the prospective method for the remaining unvested options that were granted prior to our IPO. Under prospective method application, the fair value and other provisions of the statement are to be applied only to awards modified, repurchased or cancelled after the required effective date. In addition, we are required to account for any portion of awards outstanding as of January 1, 2006 using the accounting principles originally applied to those awards. Accordingly, for stock awards issued in 2001 and 2002 which remained outstanding as of January 1, 2006, we are continuing to account for them under the measurement provisions of APB Opinion No. 25 and related FASB interpretations. In addition, our 2003 and pre-IPO 2004 grants will continue to be accounted for under the minimum value provisions of SFAS No. 123.

In accordance with SFAS No. 123R, we have continued to 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. The dividend yield is excluded from the calculation, as it is our present intention to retain all earnings. SFAS No. 123R also requires companies to estimate forfeitures. As we previously estimated forfeitures under SFAS No. 123, in this regard our adoption of SFAS No. 123R has had no impact on our results of operations for the three months ended March 31, 2006.

The following table illustrates the effect on net income and income 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):

 

 

Three Months Ended March 31,

 

 

 

2006

 

2005

 

Net income as reported

 

$

36,910

 

$

14,572

 

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

 

1,455

 

476

 

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

 

(1,593

)

(591

)

Pro forma net income

 

$

36,772

 

$

14,457

 

Basic income per share:

 

 

 

 

 

As reported

 

$

0.49

 

$

0.20

 

Pro forma

 

$

0.49

 

$

0.20

 

Diluted income per share:

 

 

 

 

 

As reported

 

$

0.48

 

$

0.19

 

Pro forma

 

$

0.47

 

$

0.19

 

 

We did not grant any options during the three months ended March 31, 2006. The weighted average fair value of options granted by us was $12.86 for the three months ended March 31, 2005. The fair value of

11




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

3.   Stock-Based Compensation (Continued)

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
March 31,

 

 

 

2005

 

Risk-free interest rate

 

 

3.42

%

 

Expected volatility

 

 

40.00

%

 

Expected life

 

 

4 years

 

 

 

Option valuation models require the input of subjective assumptions including the expected stock price volatility and expected life. 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.

The total estimated grant date fair value of stock options that vested during the three months ended March 31, 2006 was $1.7 million, which approximates the share-based compensation expense before taxes included in other operating expenses due to the monthly vesting for the majority of our stock option plans. At March 31, 2006, total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was approximately $21.0 million, which is expected to be recognized over a weighted average period of 3.2 years. The total intrinsic value of stock options exercised during the three months ended March 31, 2006 was $17.8 million. We recorded cash received from stock option exercises of $3.3 million and related tax benefits of $6.3 million during the three months ended March 31, 2006. Upon option exercise, we issue new shares of stock.

A tax benefit is created when the tax deduction resulting from the exercise of options exceeds the compensation cost recorded. Prior to the adoption of SFAS No. 123R, we presented all such tax benefits as operating cash flows on our consolidated statements of cash flows. SFAS No. 123R requires the cash flows resulting from such tax benefits to be classified as financing cash flows. Under SFAS No. 123R, we have classified excess tax benefits of $6.3 million for the three months ended March 31, 2006 as financing cash inflows.

In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.”  We have elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS No. 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R.

4.   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 required to be recognized in the accompanying consolidated balance sheets. Fair value is defined as the amount at which an instrument could be

12




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

4.   Fair Value of Financial Instruments (Continued)

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 and Restricted Cash:   These balances include cash and cash equivalents as well as restricted cash with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.

Receivables, less allowance for doubtful accounts:   Due to their short-term nature, fair value approximates carrying value.

Warehouse Receivables:   Due to their short-term nature, fair value approximates carrying value. Fair value is determined based on the terms and conditions of funded mortgage loans and generally reflects the values of the WaMu and JP Morgan warehouse lines of credit outstanding (See Note 8).

Short-Term Borrowings:   The majority of this balance represents the WaMu and JP Morgan warehouse lines of credit. Due to the short-term maturities and variable interest rates of these instruments, fair value approximates carrying value  (See Note 8).

111¤4% Senior Subordinated Notes:   Based on dealers’ quotes, the estimated fair value of the 11¼% senior subordinated notes was $176.2 million and $177.8 million at March 31, 2006 and December 31, 2005, respectively. Their actual carrying value totaled $163.1 million and $163.0 million at March 31, 2006 and December 31, 2005, respectively (See Note 8).

93¤4% Senior Notes:   Based on dealers’ quotes, the estimated fair value of the 9¾% senior notes was $140.4 million and $141.7 million at March 31, 2006 and December 31, 2005, respectively. Their actual carrying value totaled $130.0 million at both March 31, 2006 and December 31, 2005 (See Note 8).

Senior Secured Term Loan & Other Short-Term and Long-Term Debt:   Estimated fair values approximate respective carrying values because the substantial majority of these instruments are based on variable interest rates (See Note 8).

5.   Restricted Cash

Included in the accompanying consolidated balance sheets as of March 31, 2006 and December 31, 2005, is restricted cash of $5.3 million and $5.2 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 U.K.

13




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

6.   Goodwill and Other Intangible Assets

The following table summarizes the changes in the carrying amount of goodwill for us and each of our segments (See Note 16 for a description of our segments) for the three months ended March 31, 2006 (dollars in thousands):

 

 

Americas

 

EMEA

 

Asia Pacific

 

Global
Investment
Management

 

Total

 

Balance at January 1, 2006

 

$

571,517

 

$

260,988

 

 

$

14,017

 

 

 

$

33,657

 

 

$

880,179

 

Purchase accounting adjustments related to acquisitions

 

(6,951

)

2,522

 

 

10,624

 

 

 

 

 

6,195

 

Balance at March 31, 2006

 

$

564,566

 

$

263,510

 

 

$

24,641

 

 

 

$

33,657

 

 

$

886,374

 

 

Other intangible assets totaled $108.3 million and $109.5 million, net of accumulated amortization of $35.6 million and $30.6 million, as of March 31, 2006 and December 31, 2005, respectively, and are comprised of the following (dollars in thousands):

 

 

As of March 31, 2006

 

As of December 31, 2005

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management contracts

 

 

27,804

 

 

 

(18,324

)

 

 

27,769

 

 

 

(17,404

)

 

Loan servicing rights

 

 

22,120

 

 

 

(8,185

)

 

 

21,571

 

 

 

(7,657

)

 

Other

 

 

10,433

 

 

 

(9,045

)

 

 

7,260

 

 

 

(5,525

)

 

 

 

 

$

60,357

 

 

 

$

(35,554

)

 

 

$

56,600

 

 

 

$

(30,586

)

 

Total intangible assets

 

 

$

143,883

 

 

 

$

(35,554

)

 

 

$

140,126

 

 

 

$

(30,586

)

 

 

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. Both the trademarks and the trade name have indefinite useful lives and accordingly are not being amortized.

Management contracts are primarily comprised of property management contracts in the U.S., Canada, 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 brokerage 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.

14




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

6.   Goodwill and Other Intangible Assets (Continued)

Other amortizable intangible assets mainly represent other intangible assets acquired as a result of the Insignia Acquisition, including an intangible asset recognized for non-contractual revenue acquired in the U.S. as well as franchise agreements and a trade name in France. Additionally, net revenue backlog acquired from in-fill acquisitions in the latter part of 2005 is also included. All of these other intangible assets are being amortized over estimated useful lives of up to twenty years.

Amortization expense related to intangible assets was $5.0 million and $1.8 million for the three months ended March 31, 2006 and 2005, respectively. The estimated annual amortization expense for each of the years ending December 31, 2006 through December 31, 2010 approximates $9.5 million, $5.0 million, $3.7 million, $3.1 million and $3.1 million, respectively.

7.   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):

 

 

Three Months
Ended March 31,

 

 

 

2006

 

2005

 

Net revenue

 

$

102,384

 

$

107,514

 

Operating income

 

$

25,384

 

$

21,384

 

Net income

 

$

196,413

 

$

42,540

 

 

Our Global Investment Management segment 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 on an arm’s length basis and earned revenues from these unconsolidated subsidiaries.

In June 2005, CBRE Realty Finance, Inc. (CBRE Realty Finance), a real estate investment trust, was formed and is managed by our wholly owned subsidiary, CBRE Melody (formerly known as L.J. Melody & Company). On June 9, 2005, we received 300,000 shares of restricted stock and an option to purchase 500,000 shares of common stock from CBRE Realty Finance that vest in three equal annual installments. The principal business activity of CBRE Realty Finance is to originate, acquire, invest in, finance and manage a diversified portfolio of commercial real estate-related loans and securities. As of March 31, 2006, CBRE Realty Finance had total assets of $903.8 million and total equity of $290.4 million. CBRE Realty Finance is a variable interest entity as defined in FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN No. 46R). In accordance with FIN No. 46R, CBRE Realty Finance is not consolidated in our consolidated financial statements because we are not its primary beneficiary. Our maximum exposure to loss is limited to our equity investment in CBRE Realty Finance, which was approximately $17.8 million as of March 31, 2006.

15




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

8.   Debt

Since 2001, we have maintained a credit agreement with Credit Suisse (CS) and other lenders to fund strategic acquisitions and to provide for our working capital needs. Our current Credit Agreement includes the following:  (1) a term loan facility of $295.0 million, requiring quarterly principal payments of $2.95 million beginning December 31, 2004 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 make additional borrowings under the term loan facility of up to $25.0 million, subject to the satisfaction of customary conditions.

Borrowings under the term loan facility bear interest at varying rates based, at our option, on either LIBOR plus 2.00% or the alternate base rate plus 1.00%. The alternate base rate is the higher of (1) CS’s prime rate or (2) the Federal Funds Effective Rate plus one-half of one percent. The potential increase of up to $25.0 million for the term loan facility would bear interest either at the same rate as the current rate for the term loan facility 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 the senior secured term loan and current maturities of long-term debt balances in the accompanying consolidated balance sheets was $262.3 million and $265.3 million as of March 31, 2006 and December 31, 2005, 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). As of March 31, 2006 and December 31, 2005, we had no revolving credit facility principal outstanding. As of March 31, 2006, letters of credit totaling $1.6 million were outstanding, which letters of credit primarily relate to our subsidiaries’ outstanding indebtedness as well as operating leases and reduce the amount we may borrow under the revolving credit facility.

Borrowings under the Credit Agreement are jointly and severally guaranteed by us and substantially all of our domestic subsidiaries and are secured by a pledge of substantially all of our domestic assets. Additionally, the Credit Agreement requires 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 were 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, which we elected to do. During July 2004, we used a portion of the net proceeds we received from our IPO to redeem $70.0 million in aggregate principal amount, or 35.0%, of our 9¾%

16




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

8.   Debt (Continued)

senior notes, which also required the payment of a $6.8 million premium and accrued and unpaid interest through the date of redemption. 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 $130.0 million as of both March 31, 2006 and December 31, 2005.

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 unsecured senior subordinated 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. 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. During the year ended December 31, 2004, we repurchased $21.6 million in aggregate principal amount of our 11¼% senior subordinated notes in the open market. We paid $3.1 million of premiums and wrote off $0.9 million of unamortized deferred financing costs and unamortized discount in connection with these open market purchases. During the year ended December 31, 2005, we repurchased an additional $42.7 million in aggregate principal amount of our 11¼% senior subordinated notes in the open market. We paid an aggregate of $5.9 million of premiums and wrote off $1.5 million of unamortized deferred financing costs and unamortized discount in connection with these open market purchases. The amount of the 11¼% senior subordinated notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $163.1 million and $163.0 million as of March 31, 2006 and December 31, 2005, respectively.

Our Credit Agreement and the indentures governing 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.

We had short-term borrowings of $109.9 million and $272.2 million with related average interest rates of 5.3% and 5.2% as of March 31, 2006 and December 31, 2005, respectively.

Our wholly-owned subsidiary, CBRE Melody, has credit agreements with Washington Mutual Bank, FA (WaMu) and JP Morgan Chase Bank, N.A. (JP Morgan) for the purpose of funding mortgage loans that will be resold. The credit agreement with WaMu was previously with Residential Funding

17




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

8.   Debt (Continued)

Corporation (RFC). On December 1, 2004, we and RFC entered into a Fifth Amended and Restated Warehousing Credit and Security Agreement which provided for a warehouse line of credit of up to $250.0 million, bore interest at one-month LIBOR plus 1.0% and expired on September 1, 2005.  This agreement provided for the ability to terminate the warehousing commitment as of any date on or after March 1, 2005, upon not less than thirty days advance written notice.

On March 1, 2005, we and RFC signed a consent letter, which approved the assignment to and assumption of the Fifth Amended and Restated Credit and Security Agreement by WaMu. During the latter half of 2005 and early 2006, we executed several amendments extending the warehouse line of credit with WaMu, the last of which extended the agreement until June 1, 2006.

On November 15, 2005, CBRE Melody entered into a Secured Credit Agreement with JP Morgan to establish an additional warehouse line of credit. This agreement provides for a $250.0 million senior secured revolving line of credit, bears interest at the daily Chase London LIBOR rate plus 0.75% and expires on November 14, 2006.

During the three months ended March 31, 2006, we had a maximum of $256.0 million warehouse lines of credit principal outstanding. As of March 31, 2006 and December 31, 2005, we had $82.6 million and $256.0 million of warehouse lines of credit principal outstanding, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets. Additionally, we had $82.6 million and $256.0 million of mortgage loans held for sale (warehouse receivables), which represented mortgage loans funded through the lines of credit that, while committed to be purchased, had not yet been purchased as of March 31, 2006 and December 31, 2005, respectively, and which are also included in the accompanying consolidated balance sheets.

In connection with our acquisition of Westmark Realty Advisors in 1995 (now known as CB Richard Ellis Investors), we issued approximately $20.0 million in aggregate principal amount of senior notes. 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. On January 1, 2005, the interest rate on all of the Westmark senior notes was adjusted to equal the interest rate in effect with respect to amounts outstanding under our Credit Agreement. On May 31, 2005, with the exception of one note holder, we entered into an amendment to eliminate a letter of credit requirement and adjust the interest rate to equal the interest rate in effect with respect to amounts outstanding under our Credit Agreement plus twelve basis points. The amount of the Westmark senior notes included in short-term borrowings in the accompanying consolidated balance sheets was $11.2 million and $11.6 million as of March 31, 2006 and December 31, 2005, respectively.

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 March 31, 2006 and December 31, 2005, $4.6 million of the acquisition loan notes were outstanding and are included in short-term borrowings in the accompanying consolidated balance sheets.

18




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

8.   Debt (Continued)

In January 2006, we acquired an additional stake in our Japanese affiliate IKOMA CB Richard Ellis KK (IKOMA), which increased our total equity interest in IKOMA to 51%. As a result, we are now consolidating IKOMA’s financial statements, which include debt. IKOMA utilizes short-term borrowings to assist in funding its working capital requirements. As of March 31, 2006, IKOMA had $9.3 million of debt outstanding, which is 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 HSBC Bank plus 2.5%. As of March 31, 2006, $2.1 million was outstanding under this facility. As of December 31, 2005, there were no amounts outstanding under this facility.

9.   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 that may result from disposition of these lawsuits will not have a material effect on our consolidated financial position or results of operations.

We had an outstanding letter of credit totaling $0.4 million as of March 31, 2006, excluding letters of credit related to our subsidiaries’ outstanding indebtedness and operating leases. The $0.4 million outstanding letter of credit is a Fannie Mae letter of credit executed by CBRE Melody and expires on December 10, 2006. However, we are obligated to renew this letter of credit until our obligation to cover our portion of potential credit losses is satisfied.

We had guarantees totaling $2.1 million as of March 31, 2006, which includes a guarantee to Fannie Mae for $0.4 million as well as various guarantees of management contracts in our operations overseas. The guarantee obligation related to the agreement with Fannie Mae will expire in December 2007. The other guarantees will expire at the end of each of the respective management agreements.

An important part of the strategy for our investment management business involves investing our capital in certain real estate investments with our clients. These co-investments typically range from 2% to 5% of the equity in a particular fund. As of March 31, 2006, we had committed $32.2 million to fund future co-investments.

10.   Comprehensive Income

Comprehensive income consists of net income 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.

19




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

10.   Comprehensive Income (Continued)

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

 

 

Three Months
Ended March 31,

 

 

 

2006

 

2005

 

Net income

 

$

36,910

 

$

14,572

 

Foreign currency translation gain (loss)

 

2,509

 

(1,946

)

Comprehensive income

 

$

39,419

 

$

12,626

 

 

11.   Earnings Per Share

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during each period. Where appropriate, the computation of diluted EPS further assumes the dilutive effect of potential common shares, which include stock options, stock warrants and certain contingently issuable shares. Contingently issuable shares represent non-vested stock awards. 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. The following is a calculation of earnings per share (dollars in thousands, except share data):

 

 

Three Months Ended March 31,

 

 

 

2006

 

2005

 

 

 

Income

 

Shares

 

Per Share
Amount

 

Income

 

Shares

 

Per Share
Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

36,910

 

75,186,507

 

 

$

0.49

 

 

$

14,572

 

73,532,843

 

 

$

0.20

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

36,910

 

75,186,507

 

 

 

 

 

$

14,572

 

73,532,843

 

 

 

 

 

Dilutive effect of contingently issuable shares

 

 

52,743

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

2,410,338

 

 

 

 

 

 

2,651,882

 

 

 

 

 

Net income applicable to common stockholders

 

$

36,910

 

77,649,588

 

 

$

0.48

 

 

$

14,572

 

76,184,725

 

 

$

0.19

 

 

 

12.   Fiduciary Funds

The accompanying consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which are held by us on behalf of clients and which amounted to $753.5 million and $759.8 million at March 31, 2006 and December 31, 2005, respectively.

20




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

13.   Pensions

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

 

 

Three Months
Ended March 31,

 

 

 

2006

 

2005

 

Service cost

 

$

1,705

 

$

1,427

 

Interest cost

 

3,379

 

3,216

 

Expected return on plan assets

 

(3,491

)

(3,576

)

Amortization of prior service benefit

 

(114

)

(123

)

Amortization of unrecognized net loss

 

363

 

200

 

Net periodic pension cost

 

$

1,842

 

$

1,144

 

 

We contributed $2.1 million to fund our pension plans during the three months ended March 31, 2006. We expect to contribute a total of $7.7 million to fund our pension plans for the year ended December 31, 2006.

14.   Liabilities Related to the Insignia Acquisition

The Insignia Acquisition gave rise to the consolidation and elimination of some Insignia duplicate facilities and redundant employees as well as the termination of certain contracts as a result of a change of control of Insignia. As a result, we accrued certain liabilities in accordance with Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.”  These remaining liabilities assumed in connection with the Insignia Acquisition consist of the following and are included in the accompanying consolidated balance sheets (dollars in thousands):

 

 

Liability Balance
at
December 31, 2005

 

2006 Utilization

 

To be Utilized

 

Lease termination costs

 

 

$

19,289

 

 

 

$

(792

)

 

 

$

18,497

 

 

Legal settlements anticipated

 

 

7,670

 

 

 

(638

)

 

 

7,032

 

 

Severance

 

 

671

 

 

 

(5

)

 

 

666

 

 

Costs associated with exiting contracts

 

 

69

 

 

 

(36

)

 

 

33

 

 

 

 

 

$

27,699

 

 

 

$

(1,471

)

 

 

$

26,228

 

 

 

The remaining liability associated with items previously charged to merger-related costs in connection with the Insignia Acquisition consisted of the following (dollars in thousands):

 

 

Liability Balance
at
December 31, 2005

 

2006 Utilization

 

To be Utilized

 

Lease termination costs

 

 

$

18,302

 

 

 

$

(1,228

)

 

 

$

17,074

 

 

 

21




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

15.   Guarantor and Nonguarantor Financial Statements

The 9¾% senior notes, the 11¼% senior subordinated notes, and the Credit Agreement are jointly and severally guaranteed on a senior basis by us and substantially all of our domestic subsidiaries (see Note 8 for additional information).

The following condensed consolidating financial information includes:

(1)   Condensed consolidating balance sheets as of March 31, 2006 and December 31, 2005; condensed consolidating statements of operations for the three months ended March 31, 2006 and 2005; and condensed consolidating statements of cash flows for the three months ended March 31, 2006 and 2005, 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.

22




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

15.   Guarantor and Nonguarantor Financial Statements (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2006
(Dollars in thousands)

 

 

 

 

 

 

Guarantor

 

Nonguarantor

 

 

 

Consolidated

 

 

 

Parent

 

CBRE

 

Subsidiaries

 

Subsidiaries

 

Elimination

 

Total

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5

 

$

95,199

 

 

$

103,221

 

 

 

$

54,664

 

 

 

$

 

 

 

$

253,089

 

 

Restricted cash

 

 

 

 

4,798

 

 

 

532

 

 

 

 

 

 

5,330

 

 

Receivables, less allowance for doubtful accounts

 

7

 

 

 

165,596

 

 

 

261,796

 

 

 

 

 

 

427,399

 

 

Warehouse receivables (a)

 

 

 

 

82,555

 

 

 

 

 

 

 

 

 

82,555

 

 

Prepaid expenses and other current assets

 

42,434

 

80

 

 

39,839

 

 

 

33,773

 

 

 

 

 

 

116,126

 

 

Total Current Assets

 

42,446

 

95,279

 

 

396,009

 

 

 

350,765

 

 

 

 

 

 

884,499

 

 

Property and equipment, net

 

 

 

 

85,581

 

 

 

67,334

 

 

 

 

 

 

152,915

 

 

Goodwill

 

 

 

 

548,547

 

 

 

337,827

 

 

 

 

 

 

886,374

 

 

Other intangible assets, net

 

 

 

 

84,341

 

 

 

23,988

 

 

 

 

 

 

108,329

 

 

Deferred compensation assets

 

 

161,512

 

 

 

 

 

 

 

 

 

 

 

161,512

 

 

Investments in and advances to unconsolidated subsidiaries

 

 

121

 

 

79,283

 

 

 

20,987

 

 

 

 

 

 

100,391

 

 

Investments in consolidated subsidiaries

 

677,059

 

524,805

 

 

350,119

 

 

 

 

 

 

(1,551,983

)

 

 

 

 

Inter-company loan receivable

 

51,494

 

632,229

 

 

 

 

 

 

 

 

(683,723

)

 

 

 

 

Deferred tax assets, net

 

110,412

 

 

 

 

 

 

 

 

 

 

 

 

110,412

 

 

Other assets, net

 

218

 

16,611

 

 

38,079

 

 

 

26,439

 

 

 

 

 

 

81,347

 

 

Total Assets

 

$

881,629

 

$

1,430,557

 

 

$

1,581,959

 

 

 

$

827,340

 

 

 

$

(2,235,706

)

 

 

$

2,485,779

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

 

$

14,658

 

 

$

74,281

 

 

 

$

114,086

 

 

 

$

 

 

 

$

203,025

 

 

Compensation and employee benefits payable

 

 

 

 

110,198

 

 

 

94,620

 

 

 

 

 

 

204,818

 

 

Accrued bonus and profit sharing

 

 

 

 

58,631

 

 

 

98,346

 

 

 

 

 

 

156,977

 

 

Income taxes payable

 

16,316

 

 

 

 

 

 

 

 

 

 

 

 

16,316

 

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse lines of credit (a)

 

 

 

 

82,555

 

 

 

 

 

 

 

 

 

82,555

 

 

Other

 

 

 

 

15,902

 

 

 

11,486

 

 

 

 

 

 

27,388

 

 

Total short-term borrowings

 

 

 

 

98,457

 

 

 

11,486

 

 

 

 

 

 

109,943

 

 

Current maturities of long-term debt

 

 

11,800

 

 

 

 

 

723

 

 

 

 

 

 

12,523

 

 

Other current liabilities

 

20,454

 

 

 

125

 

 

 

 

 

 

 

 

 

20,579

 

 

Total Current Liabilities

 

36,770

 

26,458

 

 

341,692

 

 

 

319,261

 

 

 

 

 

 

724,181

 

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount

 

 

163,076

 

 

 

 

 

 

 

 

 

 

 

163,076

 

 

Senior secured term loan

 

 

250,500

 

 

 

 

 

 

 

 

 

 

 

250,500

 

 

9¾% senior notes

 

 

130,000

 

 

 

 

 

 

 

 

 

 

 

130,000

 

 

Inter-company loan payable

 

 

 

 

632,801

 

 

 

50,922

 

 

 

(683,723

)

 

 

 

 

Other long-term debt

 

 

 

 

 

 

 

2,021

 

 

 

 

 

 

2,021

 

 

Total Long-Term Debt

 

 

543,576

 

 

632,801

 

 

 

52,943

 

 

 

(683,723

)

 

 

545,597

 

 

Deferred compensation liability

 

 

183,464

 

 

 

 

 

 

 

 

 

 

 

183,464

 

 

Pension liability

 

 

 

 

 

 

 

41,621

 

 

 

 

 

 

41,621

 

 

Other liabilities

 

 

 

 

82,661

 

 

 

45,336

 

 

 

 

 

 

127,997

 

 

Total Liabilities

 

36,770

 

753,498

 

 

1,057,154

 

 

 

459,161

 

 

 

(683,723

)

 

 

1,622,860

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

 

 

 

 

18,060

 

 

 

 

 

 

18,060

 

 

Stockholders’ Equity

 

844,859

 

677,059

 

 

524,805

 

 

 

350,119

 

 

 

(1,551,983

)

 

 

844,859

 

 

Total Liabilities and Stockholders’ Equity

 

$

881,629

 

$

1,430,557

 

 

$

1,581,959

 

 

 

$

827,340

 

 

 

$

(2,235,706

)

 

 

$

2,485,779

 

 


(a)                 Although CBRE Melody is included among our domestic subsidiaries, which jointly and severally guarantee our 9¾% senior notes, 11¼% senior subordinated notes and our Credit Agreement, all warehouse receivables funded under the WaMu and JP Morgan lines of credit were pledged to WaMu and JP Morgan, and accordingly, were not included as collateral for these notes or our other outstanding debt.

23




CB RICHARD ELLIS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

15.   Guarantor and Nonguarantor Financial Statements (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2005
(Dollars in thousands)

 

 

 

 

 

 

Guarantor

 

Nonguarantor

 

 

 

Consolidated

 

 

 

Parent

 

CBRE

 

Subsidiaries

 

Subsidiaries

 

Elimination

 

Total

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6

 

$

106,449

 

 

$

305,956

 

 

 

$

36,878

 

 

 

$

 

 

 

$

449,289

 

 

Restricted cash

 

 

 

 

4,698

 

 

 

481

 

 

 

 

 

 

5,179

 

 

Receivables, less allowance for doubtful accounts

 

3

 

 

 

178,724

 

 

 

304,448

 

 

 

 

 

 

483,175

 

 

Warehouse receivables (a)

 

 

 

 

255,963

 

 

 

 

 

 

 

 

 

255,963

 

 

Prepaid expenses and other current assets

 

38,629

 

80

 

 

22,438

 

 

 

30,211

 

 

 

 

 

 

91,358

 

 

Total Current Assets

 

38,638

 

106,529

 

 

767,779

 

 

 

372,018

 

 

 

 

 

 

1,284,964

 

 

Property and equipment, net

 

 

 

 

80,290

 

 

 

57,365

 

 

 

 

 

 

137,655

 

 

Goodwill

 

 

 

 

556,399

 

 

 

323,780