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 June 30, 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 July 31, 2006 was 223,643,140.

 




FORM 10-Q
June 30, 2006
TABLE OF CONTENTS

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements

 

 

 

 

Consolidated Balance Sheets at June 30, 2006 (Unaudited) and December 31, 2005

 

3

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005 (Unaudited)

 

4

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (Unaudited)

 

5

 

 

Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2006 (Unaudited)

 

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

Item 2.

 

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

 

35

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

57

Item 4.

 

Controls and Procedures

 

58

PART II—OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

59

Item 1A.

 

Risk Factors

 

59

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

59

Item 6.

 

Exhibits

 

60

Signatures

 

62

 

2




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

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

127,289

 

 

$

449,289

 

 

Restricted cash

 

3,897

 

 

5,179

 

 

Receivables, less allowance for doubtful accounts of $17,595 and $15,646 at June 30, 2006 and December 31, 2005, respectively

 

473,161

 

 

483,175

 

 

Warehouse receivables

 

17,650

 

 

255,963

 

 

Prepaid expenses

 

55,449

 

 

36,402

 

 

Deferred tax assets, net

 

41,419

 

 

38,629

 

 

Other current assets

 

19,501

 

 

16,327

 

 

Total Current Assets

 

738,366

 

 

1,284,964

 

 

Property and equipment, net

 

156,998

 

 

137,655

 

 

Goodwill

 

934,340

 

 

880,179

 

 

Other intangible assets, net of accumulated amortization of $38,053 and $30,586 at June 30, 2006 and December 31, 2005, respectively

 

107,058

 

 

109,540

 

 

Deferred compensation assets

 

157,642

 

 

144,597

 

 

Investments in and advances to unconsolidated subsidiaries

 

109,128

 

 

106,153

 

 

Deferred tax assets, net

 

116,327

 

 

94,200

 

 

Other assets, net

 

77,212

 

 

58,384

 

 

Total Assets

 

$

2,397,071

 

 

$

2,815,672

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

206,405

 

 

$

254,085

 

 

Compensation and employee benefits payable

 

204,908

 

 

189,984

 

 

Accrued bonus and profit sharing

 

201,400

 

 

324,973

 

 

Income taxes payable

 

 

 

63,918

 

 

Short-term borrowings:

 

 

 

 

 

 

 

Revolving line of credit

 

248,000

 

 

 

 

Warehouse lines of credit

 

17,650

 

 

255,963

 

 

Other

 

25,567

 

 

16,189

 

 

Total short-term borrowings

 

291,217

 

 

272,152

 

 

Current maturities of long-term debt

 

513

 

 

11,913

 

 

Other current liabilities

 

21,602

 

 

20,778

 

 

Total Current Liabilities

 

926,045

 

 

1,137,803

 

 

Long-Term Debt:

 

 

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount of $1,648 at December 31, 2005

 

 

 

163,021

 

 

Senior secured term loan

 

 

 

253,450

 

 

9¾% senior notes

 

130,000

 

 

130,000

 

 

Other long-term debt

 

2,330

 

 

2,685

 

 

Total Long-Term Debt

 

132,330

 

 

549,156

 

 

Deferred compensation liability

 

187,891

 

 

172,871

 

 

Pension liability

 

44,381

 

 

41,194

 

 

Other liabilities

 

157,501

 

 

114,139

 

 

Total Liabilities

 

1,448,148

 

 

2,015,163

 

 

Commitments and contingencies

 

 

 

 

 

Minority interest

 

28,441

 

 

6,824

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Class A common stock; $0.01 par value; 325,000,000 shares authorized; 223,372,280 and 221,353,746 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively

 

2,234

 

 

2,214

 

 

Additional paid-in capital

 

566,063

 

 

548,652

 

 

Notes receivable from sale of stock

 

(101

)

 

(101

)

 

Accumulated earnings

 

384,679

 

 

283,515

 

 

Accumulated other comprehensive loss

 

(32,393

)

 

(40,595

)

 

Total Stockholders’ Equity

 

920,482

 

 

793,685

 

 

Total Liabilities and Stockholders’ Equity

 

$

2,397,071

 

 

$

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenue

 

$

836,228

 

$

672,163

 

$

1,516,319

 

$

1,210,429

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

412,496

 

338,691

 

752,941

 

606,737

 

Operating, administrative and other

 

283,598

 

241,730

 

548,759

 

464,951

 

Depreciation and amortization

 

12,255

 

10,818

 

27,185

 

21,188

 

Operating income

 

127,879

 

80,924

 

187,434

 

117,553

 

Equity income from unconsolidated subsidiaries

 

8,428

 

15,443

 

16,841

 

19,373

 

Minority interest expense

 

1,580

 

664

 

1,809

 

1,353

 

Interest income

 

2,976

 

3,058

 

6,566

 

5,503

 

Interest expense

 

13,352

 

13,374

 

27,287

 

26,972

 

Loss on extinguishment of debt

 

22,255

 

1,832

 

22,255

 

6,762

 

Income before provision for income taxes

 

102,096

 

83,555

 

159,490

 

107,342

 

Provision for income taxes

 

37,842

 

33,134

 

58,326

 

42,349

 

Net income

 

$

64,254

 

$

50,421

 

$

101,164

 

$

64,993

 

Basic income per share

 

$

0.28

 

$

0.23

 

$

0.45

 

$

0.29

 

Weighted average shares outstanding for basic income per share

 

225,964,727

 

221,355,696

 

225,763,242

 

220,979,199

 

Diluted income per share

 

$

0.27

 

$

0.22

 

$

0.43

 

$

0.28

 

Weighted average shares outstanding for diluted income per share

 

233,655,941

 

229,097,697

 

233,304,306

 

228,827,433

 

 

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,

 

 

 

2006

 

2005

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

101,164

 

$

64,993

 

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

 

 

 

 

 

Depreciation and amortization

 

27,185

 

21,188

 

Amortization and write-off of deferred financing costs

 

13,851

 

3,387

 

Amortization and write-off of long-term debt discount

 

1,648

 

534

 

Deferred compensation deferrals

 

14,560

 

11,407

 

Gain on sale of servicing rights and other assets

 

(4,323

)

(2,720

)

Equity income from unconsolidated subsidiaries

 

(16,841

)

(19,373

)

Distribution of earnings from unconsolidated subsidiaries

 

14,089

 

8,974

 

Minority interest expense

 

1,809

 

1,353

 

Provision for doubtful accounts

 

1,434

 

2,498

 

Deferred income taxes

 

(3,301

)

4,496

 

Compensation expense for stock options and non-vested stock awards

 

4,842

 

1,526

 

Incremental tax benefit from stock options exercised

 

(8,482

)

 

Tenant concessions received

 

5,809

 

988

 

Decrease in receivables

 

19,183

 

60,656

 

Increase in deferred compensation assets

 

(13,045

)

(30,417

)

Increase in prepaid expenses and other assets

 

(41,510

)

(7,535

)

Decrease in accounts payable and accrued expenses

 

(51,883

)

(28,496

)

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

 

(110,166

)

(82,738

)

(Decrease) increase in income taxes payable

 

(63,944

)

17,064

 

Increase (decrease) in other liabilities

 

30,368

 

(16,182

)

Other operating activities, net

 

83

 

(402

)

Net cash (used in) provided by operating activities

 

(77,470

)

11,201

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(27,958

)

(15,513

)

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

 

(49,527

)

(3,372

)

Investment in property held for sale

 

 

(28,221

)

Contributions to investments in unconsolidated subsidiaries, net

 

(4,895

)

(12,189

)

Proceeds from sale of servicing rights and other assets

 

3,652

 

2,649

 

Decrease in restricted cash

 

1,321

 

3,382

 

Other investing activities, net

 

(912

)

1,026

 

Net cash used in investing activities

 

(78,319

)

(52,238

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Repayment of senior secured term loan

 

(265,250

)

(5,900

)

Proceeds from revolving credit facility

 

278,000

 

 

Repayment of revolving credit facility

 

(30,000

)

 

Repayment of 11¼% senior subordinated notes

 

(164,669

)

(38,200

)

Repayment of other short-term borrowings, net

 

(5,139

)

(1,515

)

Proceeds from debt related to property held for sale

 

 

22,394

 

Proceeds from exercise of stock options

 

4,444

 

3,841

 

Incremental tax benefits from stock options exercised

 

8,482

 

 

Minority interest contributions (distributions), net

 

8,827

 

(1,306

)

Payment of deferred financing fees

 

(5,099

)

(318

)

Other financing activities, net

 

(425

)

311

 

Net cash used in financing activities

 

(170,829

)

(20,693

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(326,618

)

(61,730

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

449,289

 

256,896

 

Effect of currency exchange rate changes on cash

 

4,618

 

(2,949

)

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

127,289

 

$

192,217

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

35,493

 

$

28,358

 

Income taxes, net of refunds

 

$

125,345

 

$

18,685

 

 

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

 

221,353,746

 

 

$

2,214

 

 

 

$

548,652

 

 

 

$

(101

)

 

 

$

283,515

 

 

 

$

(20,739

)

 

 

$

(19,856

)

 

$

793,685

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

101,164

 

 

 

 

 

 

 

 

101,164

 

Net cancellation and distribution of deferred compensation stock fund
units

 

593,187

 

 

6

 

 

 

(81

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(75

)

Stock options exercised (including tax benefit)

 

1,424,035

 

 

14

 

 

 

12,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,664

 

Compensation expense for stock options and non- vested stock awards

 

 

 

 

 

 

4,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,762

 

Non-cash issuance of common stock

 

3,112

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80

 

Foreign currency translation
gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,202

 

 

8,202

 

Cancellation of non-vested stock awards

 

(1,800

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2006

 

223,372,280

 

 

$

2,234

 

 

 

$

566,063

 

 

 

$

(101

)

 

 

$

384,679

 

 

 

$

(20,739

)

 

 

$

(11,654

)

 

$

920,482

 

 

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 23,180,292 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 48,819,708 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 687,900 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 statement presentation, but do not include all disclosures required under accounting principles generally

7




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

2.   Basis of Presentation (Continued)

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 and six months ended June 30, 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.

On May 2, 2006, our board of directors approved a three-for-one stock split of our outstanding Class A common stock effected as a 100% stock dividend, which was distributed on June 1, 2006. The applicable share and per share data for all periods included herein has been restated to give effect to this stock split.

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 June 30, 2006, outstanding stock options granted under the 2001 stock incentive plan to acquire 9,568,794 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 $1.92 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.

Amended and Restated 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 and amended and restated on April 14, 2005. The 2004 stock incentive plan authorizes the grant of stock-based awards to our employees, directors or independent contractors. A total of 20,785,218 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

8




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

3.   Stock-Based Compensation (Continued)

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 this plan. Pursuant to the terms of our 2004 stock incentive plan, no employee is eligible to be granted options or stock appreciation rights covering more than 6,235,566 shares during any calendar year. This limitation is subject to a policy adopted by our board of directors which states that no person is eligible to be granted options, stock appreciation rights or restricted stock purchase rights covering more than 2,078,523 shares during any calendar year or to be granted any other form of stock award covering more than 1,039,260 shares during any calendar year. As of June 30, 2006, 6,381,095 shares were subject to options issued under our 2004 stock incentive plan and 11,614,304 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 $6.33 to $7.46 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 $11.10 to $15.43 and vest and are also exercisable generally in equal annual increments over three or four years from the date of grant. Options granted under this plan during 2006 have an exercise price of $25.67 and vest and are also exercisable generally in equal annual increments over three 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. In addition, we granted non-vested stock awards of 30,954 shares, 472,368 shares and 449,545 shares during 2004, 2005 and 2006, respectively. These non-vested stock awards vest in equal annual increments over three or four years from the date of the award. 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 is presented in the tables below:

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Exercisable
Shares

 

Weighted
Average
Exercise Price

 

Outstanding at December 31, 2005

 

17,391,048

 

 

$

5.46

 

 

4,644,981

 

 

$

2.97

 

 

Exercised

 

(1,416,243

)

 

3.09

 

 

 

 

 

 

 

 

Granted

 

15,584

 

 

25.67

 

 

 

 

 

 

 

 

Forfeited

 

(40,500

)

 

(11.00

)

 

 

 

 

 

 

 

Outstanding at June 30, 2006

 

15,949,889

 

 

$

5.67

 

 

3,557,334

 

 

$

2.99

 

 

 

9




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

3.   Stock-Based Compensation (Continued)

Options outstanding at June 30, 2006 and their related weighted average exercise price, intrinsic value and life information is presented below:

 

 

Outstanding Options

 

Exercisable Options

 

Exercise Prices

 

 

 

Number
Outstanding

 

Weighted
Average
Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value

 

Number
Exercisable

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value

 

$1.92

 

 

 

9,568,794

 

 

 

6.3

 

 

 

$

1.92

 

 

 

 

 

2,886,393

 

 

 

$

1.92

 

 

 

 

$6.33 – $7.46

 

 

 

3,213,912

 

 

 

3.3

 

 

 

7.44

 

 

 

 

 

646,269

 

 

 

7.39

 

 

 

 

$11.10 – $15.43

 

 

 

3,151,599

 

 

 

6.1

 

 

 

15.14

 

 

 

 

 

24,672

 

 

 

11.83

 

 

 

 

$25.67

 

 

 

15,584

 

 

 

6.9

 

 

 

25.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,949,889

 

 

 

5.7

 

 

 

$

5.67

 

 

$

306,716,365

 

 

3,557,334

 

 

 

$

2.99

 

 

$

77,941,188

 

 

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

 

503,322

 

 

$

14.79

 

 

Granted

 

449,545

 

 

22.68

 

 

Vested

 

 

 

 

 

Forfeited

 

(1,800

)

 

(15.43

)

 

Balance at June 30, 2006

 

951,067

 

 

$

18.52

 

 

 

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 and six months ended June 30, 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.

10




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

3.   Stock-Based Compensation (Continued)

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 were 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 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. 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 six months ended June 30, 2006.

11




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

3.   Stock-Based Compensation (Continued)

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net income as reported

 

$

64,254

 

$

50,421

 

$

101,164

 

$

64,993

 

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

 

1,616

 

448

 

3,071

 

924

 

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

 

(1,740

)

(1,090

)

(3,333

)

(1,681

)

Pro forma net income

 

$

64,130

 

$

49,779

 

$

100,902

 

$

64,236

 

Basic income per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.28

 

$

0.23

 

$

0.45

 

$

0.29

 

Pro forma

 

$

0.28

 

$

0.22

 

$

0.45

 

$

0.29

 

Diluted income per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.27

 

$

0.22

 

$

0.43

 

$

0.28

 

Pro forma

 

$

0.27

 

$

0.22

 

$

0.43

 

$

0.28

 

 

The weighted average fair value of options granted by us was $10.72 and $4.09 for the three months ended June 30, 2006 and 2005, respectively, and $10.72 and $4.26 for the six months ended June 30, 2006 and 2005, 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,

 

 

 

2006

 

2005

 

2006

 

2005

 

Dividend yield

 

0

%

0

%

0

%

0

%

Risk-free interest rate

 

4.91

%

3.65

%

4.91

%

3.65

%

Expected volatility

 

36.20

%

40.00

%

36.20

%

40.00

%

Expected life

 

5 years

 

4 years

 

5 years

 

4 years

 

 

The dividend yield assumption is excluded from the calculation, as it is our present intention to retain all earnings. The expected volatility is based on a combination of the our historical stock price and implied volatility. The selection of implied volatility data to estimate expected volatility is based upon the availability of actively traded options on the our stock. The risk-free interest rate is based upon the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options. The expected life of our stock options represents the average between the vesting and contractual term, pursuant to Staff Accounting Bulletin No. 107.

12




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

3.   Stock-Based Compensation (Continued)

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 six months ended June 30, 2006 was $3.5 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 options. At June 30, 2006, total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was approximately $19.4 million, which is expected to be recognized over a weighted average period of approximately 3.0 years. The total intrinsic value of stock options exercised during the six months ended June 30, 2006 was $28.2 million. We recorded cash received from stock option exercises of $4.4 million and related tax benefits of $8.5 million during the six months ended June 30, 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 $8.5 million for the six months ended June 30, 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 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.

13




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

4.   Fair Value of Financial Instruments (Continued)

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 for our wholly-owned subsidiary, CBRE Melody & Company (CBRE Melody), which was formerly known as L. J. Melody & Company (See Note 8).

Short-Term Borrowings:   The majority of this balance represents our new revolving credit facility and the WaMu and JP Morgan warehouse lines of credit outstanding for CBRE Melody. Due to the variable interest rates of these instruments, fair value approximates carrying value  (See Note 8).

11¼% Senior Subordinated Notes:   Based on dealers’ quotes, the estimated fair value of our 11¼% senior subordinated notes was $177.8 million at December 31, 2005. The actual carrying value totaled $163.0 million at December 31, 2005 (See Note 8).

9¾% Senior Notes:   Based on dealers’ quotes, the estimated fair value of our 9¾% senior notes was $139.1 million and $141.7 million at June 30, 2006 and December 31, 2005, respectively. Their actual carrying value totaled $130.0 million at both June 30, 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 June 30, 2006 and December 31, 2005, is restricted cash of $3.9 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.

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 six months ended June 30, 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

 

13,664

 

25,023

 

 

11,215

 

 

 

4,259

 

 

54,161

 

Balance at June 30, 2006

 

$

585,181

 

$

286,011

 

 

$

25,232

 

 

 

$

37,916

 

 

$

934,340

 

 

14




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

6.   Goodwill and Other Intangible Assets (Continued)

Other intangible assets totaled $107.1 million and $109.5 million, net of accumulated amortization of $38.1 million and $30.6 million, as of June 30, 2006 and December 31, 2005, respectively, and are comprised of the following (dollars in thousands):

 

 

As of June 30, 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

 

28,837

 

 

(19,846

)

 

27,769

 

 

(17,404

)

 

Loan servicing rights

 

21,925

 

 

(8,404

)

 

21,571

 

 

(7,657

)

 

Other

 

10,823

 

 

(9,803

)

 

7,260

 

 

(5,525

)

 

 

 

$

61,585

 

 

$

(38,053

)

 

$

56,600

 

 

$

(30,586

)

 

Total intangible assets

 

$

145,111

 

 

$

(38,053

)

 

$

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 countries, 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.

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 $1.9 million for both the three months ended June 30, 2006 and 2005 and $6.9 million and $3.7 million for the six months ended June 30, 2006 and 2005, respectively. The estimated annual amortization expense for each of the years ending December 31, 2006 through December 31, 2010 approximates $9.4 million, $5.0 million, $3.4 million, $3.2 million and $3.1 million, respectively.

15




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

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 June 30,

 

Six Months Ended June 30,

 

 

 

       2006       

 

       2005       

 

       2006       

 

       2005       

 

Net revenue

 

 

$

155,990

 

 

 

$

89,806

 

 

 

$

258,374

 

 

 

$

197,320

 

 

Operating income

 

 

$

31,172

 

 

 

$

19,104

 

 

 

$

56,556

 

 

 

$

40,488

 

 

Net (loss) income

 

 

$

(91,384

)

 

 

$

73,243

 

 

 

$

105,029

 

 

 

$

115,783

 

 

 

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 CBRE Melody. 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. 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. Effective June 9, 2006, 100,000 shares of the restricted stock vested and are now owned as common stock. As of June 30, 2006, CBRE Realty Finance had total assets of $979.2 million and total equity of $290.3 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 $18.1 million as of June 30, 2006.

8.   Debt

We had short-term borrowings of $291.2 million and $272.2 million with related average interest rates of 6.2% and 5.2% as of June 30, 2006 and December 31, 2005, respectively.

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. On June 26, 2006, we entered into a new $600.0 million multi-currency senior secured revolving credit facility (the Credit Agreement) with a syndicate of banks led by CS, as administrative and collateral agent, which fully replaced our prior credit agreement. In connection with the replacement of our prior credit facility, we wrote off $8.2 million of unamortized deferred financing fees during the three months ended June 30, 2006.

 

16




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

8.   Debt (Continued)

Our Credit Agreement includes the following:  (1) a $600.0 million revolving credit facility, including revolving credit loans, letters of credit and a swingline loan facility, all maturing on June 24, 2011 and (2) the ability to borrow an additional $200.0 million, subject to the satisfaction of customary conditions. The $600.0 million revolving credit facility allows for borrowings outside of the U.S., with sub-facilities of $5.0 million available to one of our Canadian subsidiaries, $35.0 million available to one of our Australian and New Zealand subsidiaries and $50.0 million available to one of our U.K. subsidiaries.

Borrowings under the revolving credit facility bear interest at varying rates, based at our option, on either the applicable fixed rate plus 0.575% to 1.1125% or the daily rate plus 0% to 0.1125%, 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 June 30, 2006, we had $248.0 million of revolving credit facility principal outstanding, which is included in short-term borrowings in the accompanying consolidated balance sheets. As of June 30, 2006, letters of credit totaling $1.5 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.

Our previous credit agreement included the following:  (1) a term loan facility of $295.0 million, which required 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 previous credit agreement also permitted us to make additional borrowings under a term loan facility of up to $25.0 million, subject to the satisfaction of customary conditions.

Borrowings under the term loan facility bore 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 was the higher of (1) CS’s prime rate or (2) the Federal Funds Effective Rate plus one-half of one percent. 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 $265.3 million as of December 31, 2005.

Borrowings under the previous revolving credit facility bore 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 previous credit agreement). There was no revolving credit facility principal outstanding as of December 31, 2005.

The prior credit facilities were, and the Credit Agreement continues to be, jointly and severally guaranteed by us and substantially all of our domestic subsidiaries. The prior credit facilities were secured by a pledge of substantially all of our domestic assets, while borrowings under our Credit Agreement are secured by a pledge of substantially all of the capital stock of our U.S. subsidiaries and 65% of the capital stock of certain non-U.S. subsidiaries. Additionally, the Credit Agreement requires us to pay a fee based on the total amount of the 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

17




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

8.   Debt (Continued)

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% 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 June 30, 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 were unsecured senior subordinated obligations of CBRE and were jointly and severally guaranteed on a senior subordinated basis by us and substantially all of our domestic subsidiaries. The 11¼% senior subordinated notes required semi-annual payments of interest in arrears on June 15 and December 15 and were 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. 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. As permitted by the indenture governing these notes, on June 15, 2006, we redeemed the remaining $164.7 million in aggregate principal amount of our outstanding 11¼% senior subordinated notes at 105.625% of par. In connection with this early redemption, we paid a $9.3 million premium and wrote off $4.8 million of unamortized deferred financing costs and unamortized discount. The amount of the 11¼% senior subordinated notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $163.0 million as of December 31, 2005.

Our Credit Agreement and the indenture governing our 9¾% senior notes 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, create or permit liens on assets, engage in transactions with affiliates, enter into

18




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

8.   Debt (Continued)

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.

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 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 continuing into 2006, we executed several amendments extending the warehouse line of credit with WaMu, the last of which extended the agreement until July 1, 2006.

On November 15, 2005, CBRE Melody entered into a secured credit agreement with JP Morgan to establish a 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 six months ended June 30, 2006, we had a maximum of $399.8 million of warehouse lines of credit principal outstanding. As of June 30, 2006 and December 31, 2005, we had $17.7 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 $17.7 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 June 30, 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 previous 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 previous credit agreement plus twelve basis points. This interest rate is now equal to 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 June 30, 2006 and December 31, 2005, respectively.

19




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

8.   Debt (Continued)

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, 2006 and December 31, 2005, $3.1 million and $4.6 million, respectively, of the acquisition loan notes were outstanding and are included in short-term borrowings in the accompanying consolidated balance sheets.

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 June 30, 2006, IKOMA had $7.0 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 June 30, 2006 and 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 June 30, 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 required to renew this letter of credit until our obligation to cover our portion of certain potential credit losses is satisfied.

We had guarantees totaling $3.0 million as of June 30, 2006, which include various guarantees of management contracts in our operations overseas as well as a guarantee to Fannie Mae for $0.4 million. 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 June 30, 2006, we had committed $35.8 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

20




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

10.   Comprehensive Income (Continued)

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 (dollars in thousands):

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net income

 

$

64,254

 

$

50,421

 

$

101,164

 

$

64,993

 

Foreign currency translation gain (loss)

 

5,693

 

(918

)

8,202

 

(2,864

)

Comprehensive income

 

$

69,947

 

$

49,503

 

$

109,366

 

$

62,129

 

 

11.   Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Where appropriate, the computation of diluted earnings per share 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 June 30,

 

 

 

2006

 

2005

 

 

 

Income

 

Shares

 

Per
Share
Amount

 

Income

 

Shares

 

Per
Share
Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

64,254

 

225,964,727

 

 

$

0.28

 

 

$

50,421

 

221,355,696

 

 

$

0.23

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

64,254

 

225,964,727

 

 

 

 

 

$

50,421

 

221,355,696

 

 

 

 

 

Dilutive effect of contingently issuable shares

 

 

238,009

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock
options

 

 

7,453,205

 

 

 

 

 

 

7,742,001

 

 

 

 

 

Net income applicable to common stockholders

 

$

64,254

 

233,655,941

 

 

$

0.27

 

 

$

50,421

 

229,097,697

 

 

$

0.22

 

 

 

21




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

11.   Earnings Per Share (Continued)

 

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

 

 

Income

 

Shares

 

Per
Share
Amount

 

Income

 

Shares

 

Per
Share
Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

101,164

 

225,763,242

 

 

$

0.45

 

 

$

64,993

 

220,979,199

 

 

$

0.29

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

101,164

 

225,763,242

 

 

 

 

 

$

64,993

 

220,979,199

 

 

 

 

 

Dilutive effect of contingently issuable shares

 

 

198,340

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options

 

 

7,342,724

 

 

 

 

 

 

7,848,234

 

 

 

 

 

Net income applicable to common stockholders

 

$

101,164

 

233,304,306

 

 

$

0.43

 

 

$

64,993

 

228,827,433

 

 

$

0.28

 

 

 

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 $852.0 million and $759.8 million at June 30, 2006 and December 31, 2005, respectively.

13.   Pensions

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

 

 

Three Months Ended June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

1,666

 

$

1,380

 

$

3,371

 

$

2,807

 

Interest cost

 

3,522

 

3,157

 

6,901

 

6,373

 

Expected return on plan assets

 

(3,638

)

(3,514

)

(7,129

)

(7,090

)

Amortization of prior service benefit

 

(119

)

(120

)

(233

)

(243

)

Amortization of unrecognized net loss

 

378

 

197

 

741

 

397

 

Net periodic pension cost

 

$

1,809

 

$

1,100

 

$

3,651

 

$

2,244

 

 

We contributed $1.8 million and $3.9 million to fund our pension plans during the three and six months ended June 30, 2006, respectively. We expect to contribute a total of $7.5 million to fund our pension plans for the year ending December 31, 2006.

22




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

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

 

 

 

$

(2,895

)

 

 

$

16,394

 

 

Legal settlements anticipated

 

 

7,670

 

 

 

(694

)

 

 

6,976

 

 

Severance

 

 

671

 

 

 

(5

)

 

 

666

 

 

Costs associated with exiting contracts

 

 

69

 

 

 

(69

)

 

 

 

 

 

 

 

$

27,699

 

 

 

$

(3,663

)

 

 

$

24,036

 

 

 

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

 

 

 

$

(2,515

)

 

 

$

15,787

 

 

 

15.   Guarantor and Nonguarantor Financial Statements

The 9¾% senior 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 June 30, 2006 and December 31, 2005; condensed consolidating statements of operations for the three and six months ended June 30, 2006 and 2005; and condensed consolidating statements of cash flows for the six months ended June 30, 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.

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 JUNE 30, 2006
(Dollars in thousands)

 

 

 

 

 

 

Guarantor

 

Nonguarantor

 

 

 

Consolidated

 

 

 

Parent

 

CBRE

 

Subsidiaries

 

Subsidiaries

 

Elimination

 

Total

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8

 

$

5,790

 

 

$

49,264

 

 

 

$

72,227

 

 

 

$

 

 

 

$

127,289

 

 

Restricted cash

 

 

 

 

3,342

 

 

 

555

 

 

 

 

 

 

3,897

 

 

Receivables, less allowance for doubtful accounts

 

7

 

 

 

185,833

 

 

 

287,321

 

 

 

 

 

 

473,161

 

 

Warehouse receivables(a)

 

 

 

 

17,650

 

 

 

 

 

 

 

 

 

17,650

 

 

Prepaid expenses and other current assets

 

43,725

 

1,591

 

 

39,664

 

 

 

31,389

 

 

 

 

 

 

116,369

 

 

Total Current Assets

 

43,740

 

7,381

 

 

295,753

 

 

 

391,492

 

 

 

 

 

 

738,366

 

 

Property and equipment, net

 

 

 

 

85,636

 

 

 

71,362

 

 

 

 

 

 

156,998

 

 

Goodwill

 

 

 

 

569,378

 

 

 

364,962

 

 

 

 

 

 

934,340

 

 

Other intangible assets, net

 

 

 

 

83,303

 

 

 

23,755

 

 

 

 

 

 

107,058

 

 

Deferred compensation assets

 

 

157,642

 

 

 

 

 

 

 

 

 

 

 

157,642

 

 

Investments in and advances to unconsolidated
subsidiaries

 

 

43

 

 

61,240

 

 

 

47,845

 

 

 

 

 

 

109,128

 

 

Investments in consolidated subsidiaries

 

751,610

 

474,460

 

 

403,310

 

 

 

 

 

 

(1,629,380

)

 

 

 

 

Inter-company loan receivable

 

30,282

 

671,844

 

 

 

 

 

 

 

 

(702,126

)

 

 

 

 

Deferred tax assets, net

 

116,327

 

 

 

 

 

 

 

 

 

 

 

 

116,327

 

 

Other assets, net

 

 

9,055

 

 

41,872

 

 

 

26,285

 

 

 

 

 

 

77,212

 

 

Total Assets

 

$

941,959

 

$

1,320,425

 

 

$

1,540,492

 

 

 

$

925,701

 

 

 

$

(2,331,506

)

 

 

$

2,397,071

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

 

$

2,924

 

 

$

99,454

 

 

 

$

104,027

 

 

 

$

 

 

 

$

206,405

 

 

Compensation and employee benefits payable

 

 

 

 

125,495

 

 

 

79,413

 

 

 

 

 

 

204,908

 

 

Accrued bonus and profit sharing

 

 

 

 

78,496

 

 

 

122,904

 

 

 

 

 

 

201,400

 

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving line of credit

 

 

248,000

 

 

 

 

 

 

 

 

 

 

 

248,000

 

 

Warehouse lines of credit(a)

 

 

 

 

17,650

 

 

 

 

 

 

 

 

 

17,650

 

 

Other

 

 

 

 

14,391

 

 

 

11,176

 

 

 

 

 

 

25,567

 

 

Total short-term borrowings

 

 

248,000

 

 

32,041

 

 

 

11,176

 

 

 

 

 

 

291,217

 

 

Current maturities of long-term debt

 

 

 

 

 

 

 

513

 

 

 

 

 

 

513

 

 

Other current liabilities

 

21,477

 

 

 

125

 

 

 

 

 

 

 

 

 

21,602

 

 

Total Current Liabilities

 

21,477

 

250,924

 

 

335,611

 

 

 

318,033

 

 

 

 

 

 

926,045

 

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9¾% senior notes

 

 

130,000

 

 

 

 

 

 

 

 

 

 

 

130,000

 

 

Inter-company loan payable

 

 

 

 

619,407

 

 

 

82,719

 

 

 

(702,126

)