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, 2007

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 30, 2007 was 228,659,430.

 




FORM 10-Q

March 31, 2007

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

 

 

 

Page

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2007 and December 31, 2006 (Unaudited)

 

 

3

 

 

 

 

Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (Unaudited)      

 

 

4

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (Unaudited)      

 

 

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

6

 

 

Item 2.

 

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

 

 

39

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

62

 

 

Item 4.

 

Controls and Procedures

 

 

63

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

64

 

 

Item 1A.

 

Risk Factors

 

 

64

 

 

Item 6.

 

Exhibits

 

 

64

 

 

Signatures

 

 

66

 

 

 

2




CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share data)

 

 

March 31, 2007

 

December 31, 2006

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

346,348

 

 

 

$

244,476

 

 

Restricted cash

 

 

88,963

 

 

 

212,938

 

 

Receivables, less allowance for doubtful accounts of $23,366 and $22,190 at March 31, 2007 and December 31, 2006, respectively

 

 

777,478

 

 

 

880,809

 

 

Warehouse receivables

 

 

27,150

 

 

 

103,992

 

 

Prepaid expenses

 

 

83,257

 

 

 

77,299

 

 

Deferred tax assets, net

 

 

275,692

 

 

 

143,024

 

 

Real estate under development

 

 

68,502

 

 

 

60,853

 

 

Real estate and other assets held for sale

 

 

53,255

 

 

 

69,514

 

 

Trading securities

 

 

1,619

 

 

 

355,503

 

 

Other current assets

 

 

65,351

 

 

 

71,217

 

 

Total Current Assets

 

 

1,787,615

 

 

 

2,219,625

 

 

Property and equipment, net

 

 

177,592

 

 

 

180,546

 

 

Goodwill

 

 

2,190,797

 

 

 

2,188,352

 

 

Other intangible assets, net of accumulated amortization of $67,665 and $55,065 at March 31, 2007 and December 31, 2006, respectively

 

 

429,658

 

 

 

441,073

 

 

Deferred compensation assets

 

 

229,822

 

 

 

203,271

 

 

Investments in and advances to unconsolidated subsidiaries

 

 

229,733

 

 

 

227,799

 

 

Real estate under development

 

 

175,583

 

 

 

169,268

 

 

Real estate held for investment

 

 

226,328

 

 

 

162,188

 

 

Other assets, net

 

 

151,614

 

 

 

152,509

 

 

Total Assets

 

 

$

5,598,742

 

 

 

$

5,944,631

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

$

386,158

 

 

 

$

482,607

 

 

Deferred purchase consideration

 

 

38,700

 

 

 

159,676

 

 

Compensation and employee benefits payable

 

 

347,180

 

 

 

330,826

 

 

Accrued bonus and profit sharing

 

 

258,421

 

 

 

524,184

 

 

Income taxes payable

 

 

49,403

 

 

 

48,576

 

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

Warehouse lines of credit

 

 

27,150

 

 

 

103,992

 

 

Revolving line of credit

 

 

41,036

 

 

 

 

 

Other

 

 

15,377

 

 

 

22,216

 

 

Total short-term borrowings

 

 

83,563

 

 

 

126,208

 

 

Current maturities of long-term debt

 

 

11,806

 

 

 

11,836

 

 

Notes payable on real estate

 

 

208,310

 

 

 

133,037

 

 

Liabilities related to real estate and other assets held for sale

 

 

23,374

 

 

 

56,456

 

 

Other current liabilities

 

 

3,958

 

 

 

35,961

 

 

Total Current Liabilities

 

 

1,410,873

 

 

 

1,909,367

 

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

Senior secured term loans

 

 

2,059,250

 

 

 

2,062,000

 

 

9¾% senior notes

 

 

3,310

 

 

 

3,310

 

 

Other long-term debt

 

 

1,229

 

 

 

1,363

 

 

Total Long-Term Debt

 

 

2,063,789

 

 

 

2,066,673

 

 

Deferred compensation liability

 

 

238,960

 

 

 

225,179

 

 

Deferred tax liabilities, net

 

 

57,810

 

 

 

80,603

 

 

Pension liability

 

 

58,282

 

 

 

57,971

 

 

Non current tax liabilities

 

 

174,256

 

 

 

 

 

Notes payable on real estate

 

 

155,335

 

 

 

162,830

 

 

Other liabilities

 

 

169,701

 

 

 

182,231

 

 

Total Liabilities

 

 

4,329,006

 

 

 

4,684,854

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Minority interest

 

 

74,954

 

 

 

78,136

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

Class A common stock; $0.01 par value; 325,000,000 shares authorized; 228,445,682 and 227,474,835 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively

 

 

2,284

 

 

 

2,275

 

 

Additional paid-in capital

 

 

637,107

 

 

 

610,406

 

 

Notes receivable from sale of stock

 

 

(60

)

 

 

(60

)

 

Accumulated earnings

 

 

585,002

 

 

 

602,086

 

 

Accumulated other comprehensive loss

 

 

(29,551

)

 

 

(33,066

)

 

Total Stockholders’ Equity

 

 

1,194,782

 

 

 

1,181,641

 

 

Total Liabilities and Stockholders’ Equity

 

 

$

5,598,742

 

 

 

$

5,944,631

 

 

 

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,

 

 

 

2007

 

2006

 

Revenue

 

$

1,213,961

 

$

751,272

 

Costs and expenses:

 

 

 

 

 

Cost of services

 

649,673

 

411,626

 

Operating, administrative and other

 

411,937

 

265,161

 

Depreciation and amortization

 

27,368

 

14,930

 

Merger-related charges

 

31,855

 

 

Operating income

 

93,128

 

59,555

 

Equity income from unconsolidated subsidiaries

 

4,249

 

8,413

 

Minority interest expense

 

2,900

 

229

 

Other loss

 

37,534

 

 

Interest income

 

7,013

 

3,590

 

Interest expense

 

41,982

 

13,935

 

Income before provision for income taxes

 

21,974

 

57,394

 

Provision for income taxes

 

9,997

 

20,484

 

Net income

 

$

11,977

 

$

36,910

 

Basic income per share

 

$

0.05

 

$

0.16

 

Weighted average shares outstanding for basic income per share

 

229,663,454

 

225,559,521

 

Diluted income per share

 

$

0.05

 

$

0.16

 

Weighted average shares outstanding for diluted income per share

 

236,932,240

 

232,948,764

 

 

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,

 

 

 

2007

 

2006

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

11,977

 

$

36,910

 

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

 

 

 

 

 

Depreciation and amortization

 

27,368

 

14,930

 

Amortization of deferred financing costs

 

1,794

 

1,211

 

Amortization of long-term debt discount

 

 

55

 

Deferred compensation deferrals

 

13,787

 

7,364

 

Gain on sale of servicing rights and other assets

 

(200

)

(698

)

Loss on trading securities

 

33,654

 

 

Loss on interest rate swaps

 

3,880

 

 

Equity income from unconsolidated subsidiaries

 

(4,249

)

(8,413

)

Distribution of earnings from unconsolidated subsidiaries

 

5,306

 

4,105

 

In-kind distributions from unconsolidated subsidiaries

 

(2,710

)

 

Minority interest expense

 

2,900

 

229

 

Provision for (recovery of) doubtful accounts

 

1,645

 

(362

)

Deferred income taxes

 

(40

)

(7,967

)

Compensation expense and merger-related expense related to stock options and stock awards

 

17,251

 

2,263

 

Incremental tax benefit from stock options exercised

 

(9,139

)

(6,284

)

Tenant concessions received

 

1,155

 

2,394

 

Proceeds from sale of trading securities

 

320,047

 

 

Decrease in receivables

 

113,225

 

59,341

 

Increase in deferred compensation assets

 

(26,551

)

(16,915

)

Decrease (increase) in prepaid expenses and other assets

 

1,504

 

(41,576

)

Decrease in real estate held for sale and under development

 

2,139

 

 

Increase in notes payable on real estate held for sale and under development

 

3,352

 

 

Decrease in accounts payable and accrued expenses

 

(113,661

)

(49,559

)

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

 

(259,206

)

(153,336

)

Decrease in income taxes payable

 

(28,783

)

(41,309

)

(Decrease) increase in other liabilities

 

(1,446

)

12,983

 

Other operating activities, net

 

230

 

(124

)

Net cash provided by (used in) operating activities

 

115,229

 

(184,758

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(9,273

)

(16,066

)

Acquisition of businesses (other than Trammell Crow Company) including net assets acquired, intangibles and goodwill, net of cash acquired

 

(16,157

)

(8,315

)

Cash paid for acquisition of Trammell Crow Company

 

(121,631

)

 

(Contributions to) distributions from investments in unconsolidated subsidiaries, net

 

(9,094

)

3,954

 

Proceeds from the sale of servicing rights and other assets

 

3,134

 

188

 

Additions to real estate held for investment

 

(50,826

)

 

Decrease (increase) in restricted cash

 

123,989

 

(124

)

Other investing activities, net

 

(340

)

261

 

Net cash used in investing activities

 

(80,198

)

(20,102

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Repayment of senior secured term loans

 

(2,750

)

(2,950

)

Proceeds from revolving credit facility

 

73,186

 

 

Repayment of revolving credit facility

 

(33,062

)

 

Proceeds from notes payable on real estate held for investment

 

43,634

 

 

Repayment of notes payable on real estate held for investment

 

(8,052

)

 

(Repayment of) proceeds from short-term borrowings and other loans, net

 

(6,909

)

1,281

 

Proceeds from exercise of stock options

 

4,297

 

3,273

 

Incremental tax benefit from stock options exercised

 

9,139

 

6,284

 

Minority interest (distributions) contributions, net

 

(12,627

)

328

 

Other financing activities, net

 

(1,619

)

(141

)

Net cash provided by financing activities

 

65,237

 

8,075

 

Effect of currency exchange rate changes on cash and cash equivalents

 

1,604

 

585

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

101,872

 

(196,200

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

244,476

 

449,289

 

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

346,348

 

$

253,089

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

38,472

 

$

4,994

 

Income taxes, net of refunds

 

$

38,887

 

$

68,819

 

 

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

5




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

1.   Nature of Operations

CB Richard Ellis Group, Inc. (formerly known as CBRE Holding, Inc.), a Delaware corporation (which may be referred to in these financial statements 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.

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.

In December 2006, we expanded our global leadership as we completed the acquisition of Trammell Crow Company, our largest acquisition to date. On December 20, 2006, pursuant to an Agreement and Plan of Merger dated October 30, 2006 (the Trammell Crow Company Acquisition Agreement), by and among us, A-2 Acquisition Corp., a Delaware corporation and our wholly owned subsidiary (Merger Sub), and Trammell Crow Company, the Merger Sub was merged with and into the Trammell Crow Company (the Trammell Crow Company Acquisition). Trammell Crow Company was the surviving corporation in the Trammell Crow Company Acquisition and upon the closing of the Trammell Crow Company Acquisition became our indirect wholly owned subsidiary. We have no substantive operations other than our investment in CBRE and Trammell Crow Company.

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 and provide development services under the “Trammell Crow” brand name. Our business is focused on

6




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

1.   Nature of Operations (Continued)

several service competencies, including tenant representation, property/agency leasing, property sales, development services, commercial mortgage origination and servicing, capital markets (equity and debt) solutions, commercial property and corporate facilities 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 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, 2007 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2007. 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, 2006.

Pursuant to Emerging Issues Task Force (EITF) Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred,” and EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” our management concluded that the accounting for certain reimbursements (primarily salaries and related charges) related to its facilities and property management operations should be presented on a grossed up versus a net expense basis. Accordingly, we reclassified such reimbursements from cost of services to revenue for the three months ended March 31, 2006 to be consistent with the presentation for the three months ended March 31, 2007. As a result, amounts reflected as “Revenue” and “Cost of Services” in the consolidated statements of operations for the three months ended March 31, 2006 have been increased from the amounts previously reported by $71.2 million. This reclassification had no impact on operating income, net income, earnings per share or stockholders’ equity.

On April 28, 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 presented has been restated to give effect to this stock split.

7




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

3.   Trammell Crow Company Acquisition

On December 20, 2006, pursuant to an Agreement and Plan of Merger dated October 30, 2006 (the Trammell Crow Company Acquisition Agreement), by and among us, A-2 Acquisition Corp., a Delaware corporation and our wholly owned subsidiary (Merger Sub) and Trammell Crow Company, the Merger Sub was merged with and into Trammell Crow Company (the Trammell Crow Company Acquisition). Trammell Crow Company was the surviving corporation in the Trammell Crow Company Acquisition and upon the closing of the Trammell Crow Company Acquisition became our indirect wholly owned subsidiary. We acquired Trammell Crow Company to expand our global leadership and to strengthen our ability to provide integrated account management and comprehensive real estate services for our clients.

Pursuant to the terms of the Trammell Crow Company Acquisition Agreement, (1) each issued and outstanding share of Trammell Crow Company Common Stock (other than treasury shares), par value $0.01 per share, was converted into the right to receive $49.51 in cash, without interest (the Trammell Crow Company Common Stock Merger Consideration), (2) all outstanding options to acquire Trammell Crow Company Common Stock that were vested as of December 20, 2006 were cancelled and represented the right to receive a cash payment, without interest, equal to the excess, if any, of the Trammell Crow Company Common Stock Merger Consideration over  the per share exercise price of the option, multiplied by the number of shares of Trammell Crow Company Common Stock subject to the option, less any applicable withholding taxes and (3) all outstanding stock units with underlying shares of Trammell Crow Company Common Stock held in the Trammell Crow Company Employee Stock Purchase Plan were converted into the right to receive $49.51 in cash, without interest. Following the Trammell Crow Company Acquisition, the Trammell Crow Company Common Stock was delisted from the New York Stock Exchange and deregistered under the Securities Exchange Act of 1934.

The funding to complete the Trammell Crow Company Acquisition, as well as the refinancing of substantially all of the outstanding indebtedness of Trammell Crow Company (other than notes payable on real estate), was obtained through senior secured term loan facilities for an aggregate principal amount of up to $2.2 billion (see Note 10).

The aggregate preliminary purchase price for the Trammell Crow Company Acquisition was approximately $1.9 billion, which includes: (1) $1.8 billion in cash paid for shares of Trammell Crow Company’s outstanding common stock, at $49.51 per share, including outstanding stock units held in the Trammell Crow Company Employee Stock Purchase Plan, (2) cash payments of $120.0 million to holders of Trammell Crow Company’s vested options and (3) $18.7 million of direct costs incurred in connection with the acquisition, consisting mostly of legal and accounting fees. The preliminary purchase accounting adjustments related to the Trammell Crow Company Acquisition have been recorded in the accompanying consolidated financial statements as of, and for periods subsequent to, December 20, 2006. The excess purchase price over the estimated fair value of net assets acquired has been recorded to goodwill. The goodwill is not deductible for tax purposes. The final valuation of the net assets acquired is expected to be completed as soon as practicable, but no later than one year from the acquisition date. Given the size and complexity of the acquisition, the fair valuation of certain assets acquired, primarily other intangible assets, investments in and advances to unconsolidated subsidiaries and deferred tax assets, is still preliminary. Additionally, the various real estate assets acquired are being reflected at Trammell Crow Company’s historical basis until the appraisal process has been completed. Lastly, adjustments to the estimated liabilities assumed in connection with the Trammell Crow Company Acquisition as well as deferred tax

8




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

3.   Trammell Crow Company Acquisition (Continued)

liabilities and minority interest, may still be required. As of March 31, 2007, approximately $38.7 million of the total purchase price (excluding direct costs) has not been paid out and is included in restricted cash in the accompanying consolidated balance sheets along with a corresponding current liability of $38.7 million, which is included in deferred purchase consideration in the accompanying consolidated balance sheets. These amounts relate to outstanding shares of Trammell Crow Company common stock that have not yet been tendered. Payment in full will be made as share certificates are tendered.

The Trammell Crow Company Acquisition gave rise to the acceleration of vesting of some restricted shares of Trammell Crow Company common stock as a result of the change in control of Trammell Crow Company as well as costs associated with exiting contracts and other contractual obligations. Additionally, the Trammell Crow Company Acquisition has given rise to the consolidation and elimination of some Trammell Crow Company duplicate facilities and redundant employees as well as lawsuits involving Trammell Crow Company. As a result, we have accrued certain liabilities in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” These liabilities assumed in connection with the Trammell Crow Company Acquisition consist of the following (dollars in thousands):

 

 

2006 Charge
to Goodwill

 

2006
Utilization

 

2007
Adjustments

 

2007
Utilization

 

To be Utilized at
March 31, 2007

 

Change of control payments

 

 

$

36,461

 

 

 

$

(35,727

)

 

 

$

 

 

 

$

 

 

 

$

734

 

 

Costs associated with exiting contracts and other contractual obligations

 

 

29,635

 

 

 

(500

)

 

 

(1,561

)

 

 

(7,559

)

 

 

20,015

 

 

Severance

 

 

18,422

 

 

 

 

 

 

536

 

 

 

(4,218

)

 

 

14,740

 

 

Lease termination costs

 

 

11,085

 

 

 

 

 

 

229

 

 

 

(322

)

 

 

10,992

 

 

Legal settlements anticipated

 

 

6,212

 

 

 

 

 

 

(2

)

 

 

(78

)

 

 

6,132

 

 

 

 

 

$

101,815

 

 

 

$

(36,227

)

 

 

$

(798

)

 

 

$

(12,177

)

 

 

$

52,613

 

 

 

9




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

3.   Trammell Crow Company Acquisition (Continued)

Unaudited pro forma results, assuming the Trammell Crow Company Acquisition had occurred as of January 1, 2006 for purposes of the 2006 pro forma disclosures, are presented below. These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as increased amortization expense as a result of intangible assets acquired in the Trammell Crow Company Acquisition as well as higher interest expense as a result of debt incurred to finance the Trammell Crow Company Acquisition. These unaudited pro forma results do not purport to be indicative of what operating results would have been had the Trammell Crow Company Acquisition occurred on January 1, 2006 and may not be indicative of future operating results (dollars in thousands, except share data):

 

 

Three Months
Ended March 31,

 

 

 

2006

 

Revenue

 

 

$

967,044

 

 

Operating income

 

 

37,327

 

 

Net income

 

 

1,755

 

 

Basic income per share

 

 

$

0.01

 

 

Weighted average shares outstanding for basic income per share

 

 

225,559,521

 

 

Diluted income per share

 

 

$

0.01

 

 

Weighted average shares outstanding for diluted income per share

 

 

232,948,764

 

 

 

4.   Restricted Cash

Included in the accompanying consolidated balance sheets as of March 31, 2007 and December 31, 2006, is restricted cash of $89.0 million and $212.9 million, respectively, which includes restricted cash set aside to cover deferred purchase consideration associated with the Trammell Crow Company Acquisition. The deferred purchase consideration relates to outstanding shares of Trammell Crow Company common stock that have not yet been tendered. Payment in full is being made as share certificates are tendered. The restricted cash balances also include escrow accounts acquired as a result of the Trammell Crow Company Acquisition as well as other strategic in-fill acquisitions completed during 2006 and cash pledged to secure the guarantee of certain short-term notes issued in connection with previous acquisitions by Insignia in the United Kingdom (U.K.).

10




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

5.   Goodwill and Other Intangible Assets

The following table summarizes the changes in the carrying amount of goodwill for the three months ended March 31, 2007 (dollars in thousands):

 

 

Americas

 

EMEA

 

Asia Pacific

 

Global
Investment
Management

 

Development
Services

 

Total

 

Balance at January 1, 2007

 

$

1,717,334

 

$

327,858

 

 

$

32,081

 

 

 

$

38,162

 

 

 

$

72,917

 

 

$

2,188,352

 

Purchase accounting adjustments related to acquisitions

 

4,316

 

1,591

 

 

74

 

 

 

 

 

 

186

 

 

6,167

 

Adoption of FIN 48 (see Note 23)

 

(5,359

)

 

 

 

 

 

 

 

 

 

 

(5,359

)

Foreign exchange movement

 

18

 

1,057

 

 

537

 

 

 

25

 

 

 

 

 

1,637

 

Balance at March 31, 2007

 

$

1,716,309

 

$

330,506

 

 

$

32,692

 

 

 

$

38,187

 

 

 

$

73,103

 

 

$

2,190,797

 

 

Other intangible assets totaled $429.7 million and $441.1 million, net of accumulated amortization of $67.7 million and $55.1 million, as of March 31, 2007 and December 31, 2006, respectively, and are comprised of the following (dollars in thousands):

 

 

As of March 31, 2007

 

As of December 31, 2006

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Unamortizable intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

$

63,700

 

 

 

 

 

$

63,700

 

 

 

 

 

Trade name

 

103,826

 

 

 

 

 

103,826

 

 

 

 

 

 

 

$

167,526

 

 

 

 

 

$

167,526

 

 

 

 

 

Amortizable intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

220,000

 

 

$

(3,025

)

 

$

220,000

 

 

$

(60

)

 

Backlog and incentive fees

 

45,930

 

 

(26,543

)

 

44,630

 

 

(18,780

)

 

Management contracts

 

28,695

 

 

(22,229

)

 

28,585

 

 

(21,333

)

 

Loan servicing rights

 

22,014

 

 

(9,767

)

 

22,143

 

 

(9,365

)

 

Other

 

13,158

 

 

(6,101

)

 

13,254

 

 

(5,527

)

 

 

 

$

329,797

 

 

$

(67,665

)

 

$

328,612

 

 

$

(55,065

)

 

Total intangible assets

 

$

497,323

 

 

$

(67,665

)

 

$

496,138

 

 

$

(55,065

)

 

 

In accordance with Statement of Financial Accounting Standards (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. In connection with the Trammell Crow Company Acquisition, an $84.0 million trade name was separately identified, which represents the

11




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

5.   Goodwill and Other Intangible Assets (Continued)

Trammell Crow trade name to be used in providing development services by us on an indefinite basis. Both the trademarks and the trade names have indefinite useful lives and accordingly are not being amortized.

Customer relationships represent intangible assets identified in the Trammell Crow Company Acquisition relating to existing relationships primarily in Trammell Crow Company’s brokerage, property management, project management and facilities management lines of business. These intangible assets are being amortized over estimated useful lives of up to 20 years.

Backlog and incentive fees represent the fair value of net revenue backlog and incentive fees acquired as part of the Trammell Crow Company Acquisition as well as other in-fill acquisitions. These intangible assets are being amortized over estimated useful lives of up to one year.

Management contracts are primarily comprised of property management contracts in the United States (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, certain contract intangibles acquired in the Trammell Crow Company Acquisition have also been included here. All other intangible assets are being amortized over estimated useful lives of up to 20 years.

Amortization expense related to intangible assets was $12.3 million and $5.0 million for the three months ended March 31, 2007 and 2006, respectively. The estimated annual amortization expense for each of the years ending December 31, 2007 through December 31, 2011 approximates $46.8 million, $18.0 million, $16.5 million, $15.9 million and $14.1 million, respectively.

12




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

6.   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,

 

 

 

2007

 

2006

 

Development Services:

 

 

 

 

 

Revenue

 

$

11,599

 

$

 

Operating income

 

$

3,349

 

$

 

Net loss

 

$

(1,295

)

$

 

Other:

 

 

 

 

 

Revenue

 

$

279,301

 

$

102,384

 

Operating income

 

$

50,836

 

$

25,384

 

Net income

 

$

44,922

 

$

196,413

 

Total:

 

 

 

 

 

Revenue

 

$

290,900

 

$

102,384

 

Operating income

 

$

54,185

 

$

25,384

 

Net income

 

$

43,627

 

$

196,413

 

 

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 connection with the Trammell Crow Company Acquisition, we acquired Trammell Crow Company’s investments in unconsolidated subsidiaries. Trammell Crow Company has agreements to provide development and brokerage services to certain of its unconsolidated development subsidiaries on an arm’s length basis and earned revenues from these unconsolidated subsidiaries.

7.   Real Estate and Other Assets Held for Sale and Related Liabilities

Real estate and other assets held for sale include completed real estate projects or land for sale in their present condition that have met all of the “held for sale” criteria of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and other assets directly related to such projects. Liabilities related to real estate and other assets held for sale have been included as a single line item in the accompanying consolidated balance sheets. In accordance with SFAS No. 144, certain assets classified as held for sale at March 31, 2007, or sold in the three months ended March 31, 2007, that were not classified as held for sale at December 31, 2006, were reclassified to real estate and other assets held for sale in the accompanying consolidated balance sheets as of December 31, 2006.

13




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

7.   Real Estate and Other Assets Held for Sale and Related Liabilities (Continued)

Real estate and other assets held for sale and related liabilities were as follows (dollars in thousands):

 

 

March 31, 2007

 

December, 31, 2006

 

Assets:

 

 

 

 

 

 

 

 

 

Real estate held for sale (see Note 8)

 

 

$

52,746

 

 

 

$

67,549

 

 

Other current assets

 

 

55

 

 

 

1,035

 

 

Other assets

 

 

454

 

 

 

930

 

 

Total real estate and other assets held for sale

 

 

53,255

 

 

 

69,514

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

829

 

 

 

5,078

 

 

Notes payable on real estate held for sale (see Note 9)

 

 

22,322

 

 

 

51,166

 

 

Other current liabilities

 

 

223

 

 

 

173

 

 

Other liabilities

 

 

 

 

 

39

 

 

Total liabilities related to real estate and other assets held for sale

 

 

23,374

 

 

 

56,456

 

 

Net real estate and other assets held for sale

 

 

$

29,881

 

 

 

$

13,058

 

 

 

8.   Real Estate

We provide build-to-suit services for our clients and also develop or purchase certain projects which we intend to sell to institutional investors upon project completion or redevelopment. Therefore, we have ownership of real estate until such projects are sold. Certain real estate assets owned by us secure the outstanding balances of underlying mortgage or construction loans. The majority of our real estate is included in our Development Services segment (see Note 22). Real estate owned by us consisted of the following (dollars in thousands):

 

 

March 31, 2007

 

December 31, 2006

 

Real estate under development (current)

 

 

$

68,502

 

 

 

$

60,853

 

 

Real estate included in assets held for sale (see Note 7)

 

 

52,746

 

 

 

67,549

 

 

Real estate under development (non current)

 

 

175,583

 

 

 

169,268

 

 

Real estate held for investment(1)

 

 

226,328

 

 

 

162,188

 

 

Total real estate(2)

 

 

$

523,159

 

 

 

$

459,858

 

 


(1)          Net of accumulated depreciation of $0.8 million at March 31, 2007.

(2)          Includes balances for lease intangibles and tenant origination costs of $8.2 million and $4.1 million, respectively, at March 31, 2007 and $2.6 million and $3.0 million, respectively, at December 31, 2006. We record lease intangibles and tenant origination costs upon acquiring buildings with in-place leases. The balances are shown net of amortization, which is recorded as an increase to or a reduction of rental income for lease intangibles and as amortization expense for tenant origination costs.

14




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

9.   Notes Payable on Real Estate

We had loans secured by real estate (the majority of which were construction loans), which consisted of the following (dollars in thousands):

 

 

March 31,
2007

 

December 31,
2006

 

Current portion of notes payable on real estate

 

$

208,310

 

 

$

133,037

 

 

Notes payable on real estate included in liabilities related to real estate and other assets held for sale (see Note 7)

 

22,322

 

 

51,166

 

 

Total notes payable on real estate, current portion

 

230,632

 

 

184,203

 

 

Notes payable on real estate, non current portion

 

155,335

 

 

162,830

 

 

Total notes payable on real estate

 

$

385,967

 

 

$

347,033

 

 

 

At March 31, 2007, $15.0 million of the current portion and $2.0 million of the non current portion of notes payable on real estate were recourse to us, beyond being recourse to the single-purpose entity that held the real estate asset and was the obligor on the note payable.

We have one participating mortgage loan obligation related to a real estate project. The mortgage lender participates in net operating cash flow of the mortgaged real estate project, if any, and net proceeds upon the sale of the project. The lender receives 6.0% fixed interest on the outstanding balance of its note, compounded monthly, and participates in 35.0% to 80.0% of net proceeds based on reaching various internal rates of return. The amount of the participating liability was $4.7 million and $6.1 million at March 31, 2007 and December 31, 2006, respectively.

10.   Debt

We had short-term borrowings of $83.6 million and $126.2 million with related average interest rates of 6.4% and 5.8% as of March 31, 2007 and December 31, 2006, 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 December 20, 2006, we entered into an amendment and restatement to our credit agreement (the Credit Agreement) to, among other things, allow the consummation of the Trammell Crow Company Acquisition and the incurrence of senior secured term loan facilities for an aggregate principal amount of up to $2.2 billion.

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. This 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, (2) a $1.1 billion tranche A term loan facility, requiring quarterly principal payments beginning March 31, 2008 through September 30, 2011, with the balance payable on December 20, 2011, (3) a $1.1 billion tranche B term loan facility, requiring quarterly principal payments of $2.75 million beginning March 31, 2007 through September 30, 2013, with the balance payable on December 20, 2013 and (4) the ability to borrow an additional $300.0 million, subject to the satisfaction of customary conditions.

Borrowings under the revolving credit facility bear interest at varying rates, based at our option, on either the applicable fixed rate plus 1.2375% or the daily rate plus 0.2375% for the first year; thereafter, at

15




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

10.   Debt (Continued)

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 December 31, 2006, we had no revolving credit facility principal outstanding. As of March 31, 2007, we had $41.0 million of revolving credit facility principal outstanding with a related weighted average interest rate of 6.8%, which is included in short-term borrowings in the accompanying consolidated balance sheets. As of March 31, 2007, letters of credit totaling $5.6 million were outstanding, which letters of credit primarily relate to our outstanding indebtedness as well as letters of credit issued in connection with development activities in our Development Services segment and reduce the amount we may borrow under the revolving credit facility.

Borrowings under the tranche A term loan facility bear interest, based at our option, on either the applicable fixed rate plus 1.50% or the daily rate plus 0.50% for the first year, thereafter, at the applicable fixed rate plus 0.75% to 1.375% or the daily rate plus 0% to 0.375%, in both cases as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in our Credit Agreement). Borrowings under the tranche B term loan facility bear interest, based at our option, on either the applicable fixed rate plus 1.50% or the daily rate plus 0.50%. As of March 31, 2007 and December 31, 2006, we had $973.0 million and $1.1 billion of tranche A and tranche B term loan facilities’ principal outstanding, respectively, each with a related weighted average interest rate of 6.8%, which are included in the accompanying consolidated balance sheets.

On February 26, 2007, we entered into two interest rate swap agreements with a total notional amount of $1.4 billion and a maturity date of December 31, 2009. The purpose of these interest rate swap agreements is to hedge potential changes to our cash flows due to the variable interest nature of our senior secured term loan facilities. On March 20, 2007, these interest rate swaps were designated as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. We incurred a loss on these interest rate swaps from the date we entered into the swaps up to the designation date of approximately $3.9 million, which is included in other loss in the accompanying consolidated statements of operation. The hedge ineffectiveness for the period from March 20, 2007 through March 31, 2007 was not material.

The Credit Agreement is jointly and severally guaranteed by us and substantially all of our domestic subsidiaries. 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.

Our Credit Agreement contains 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 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 a maximum leverage ratio of EBITDA (as defined in the Credit Agreement) to funded debt.

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

16




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

10.   Debt (Continued)

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% senior notes. Pursuant to the terms of the Trammell Crow Company Acquisition Agreement, on November 3, 2006 we caused CBRE to launch a tender offer and consent solicitation for all of our outstanding 9¾% senior notes. 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 remaining 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 $3.3 million as of March 31, 2007 and December 31, 2006.

On March 2, 2007, we entered into a $50.0 million credit note with Wells Fargo Bank for the purpose of purchasing eligible investments, which include cash equivalents, agency securities, A1/P1 commercial paper and eligible money market funds. The proceeds of this note will not be made generally available to us, but will instead be deposited in an investment account maintained by Wells Fargo Bank and will be used and applied solely to purchase eligible investment securities. Borrowings under the revolving credit note will bear interest at 0.25% and the note will terminate on December 3, 2007, which can be extended by a written amendment. As of March 31, 2007, there were no amounts outstanding under this revolving credit note.

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.

Effective July 1, 2006, CBRE Melody entered into a $200.0 million multifamily mortgage loan repurchase agreement, or Repo Agreement, with WaMu. The Repo Agreement continues indefinitely unless or until 30 days written notice is delivered, prior to the termination date, by either CBRE Melody or WaMu. Under the Repo Agreement, CBRE Melody will originate multifamily loans and sell such loans to one or more investors, including Fannie Mae, Freddie Mac, Ginnie Mae or any of several private institutional investors. WaMu has agreed to purchase certain qualifying mortgage loans after such loans have been originated, but prior to sale to one of the aforementioned investors, on a servicing retained basis, subject to CBRE Melody’s obligation to repurchase the mortgage loan.

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 expired on

17




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

10.   Debt (Continued)

November 14, 2006. On November 14, 2006, CBRE Melody executed an amendment to the credit agreement whereby the maturity date was extended to November 30, 2007.

During the three months ended March 31, 2007, we had a maximum of $104.0 million warehouse lines of credit principal outstanding. As of March 31, 2007 and December 31, 2006, we had $27.2 million and $104.0 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 $27.2 million and $104.0 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, 2007 and December 31, 2006, respectively, and which are also included in the accompanying consolidated balance sheets.

On July 31, 2006, CBRE Melody entered into a $60.0 million revolving credit note with JP Morgan for the purpose of purchasing qualified investment securities, which include but are not limited to U.S. Treasury and Agency securities. The proceeds of this note will not be made generally available to CBRE Melody, but will instead be deposited in an investment account maintained by JP Morgan and will be used and applied solely to purchase qualified investment securities. Borrowings under the revolving credit note will bear interest at 0.50%. Initially, all outstanding principal on this note and all accrued interest unpaid shall be due and payable on demand, or if no demand is made, then on or before July 31, 2007. On November 14, 2006, CBRE Melody executed an amendment extending the maturity of this note to November 30, 2007. As of March 31, 2007 and December 31, 2006, there were no amounts outstanding under this revolving credit note.

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. The interest rate on the Westmark senior notes is currently equal to the interest rate in effect with respect to amounts outstanding under our Credit Agreement plus 12 basis points. The amount of the Westmark senior notes included in short-term borrowings in the accompanying consolidated balance sheets was $11.2 million as of March 31, 2007 and December 31, 2006.

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, 2007 and December 31, 2006, IKOMA had $1.7 million and $6.7 million, respectively, of debt outstanding, which is included in short-term borrowings in the accompanying consolidated balance sheets.

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, 2007 and December 31, 2006, $2.2 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)

10.   Debt (Continued)

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, 2007 and December 31, 2006, there were no amounts outstanding under this facility.

11.   Commitments and Contingencies

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

We had outstanding letters of credit totaling $4.4 million as of March 31, 2007, excluding letters of credit related to our subsidiaries’ outstanding reserves for claims under certain insurance programs and indebtedness. These letters of credit were/are primarily executed by Trammell Crow Company in the normal course of business of our Development Services segment. The letters of credit expire at varying dates through November 2008.

We had guarantees totaling $6.8 million as of March 31, 2007, excluding guarantees related to consolidated indebtedness and operating leases. These guarantees primarily include a debt repayment guaranty of an unconsolidated subsidiary as well as various guarantees of management contracts in our operations overseas. The guarantee obligation related to the debt repayment guaranty of an unconsolidated subsidiary expires in December 2009. The other guarantees will expire at the end of each of the respective management agreements.

Additionally, in connection with the Trammell Crow Company Acquisition, we have assumed numerous completion and budget guarantees relating to development projects. These guarantees were/are made by Trammell Crow Company in the normal course of business. Each of these guarantees requires us to complete construction of the relevant project within a specified timeframe and/or within a specified budget, with us potentially being liable for costs to complete in excess of such timeframe or budget. However, we generally have “guaranteed maximum price” contracts with reputable general contractors with respect to projects for which we provide these guarantees. These contracts are intended to pass the budget risk to such contractors. Our management does not expect to incur any material losses under these guarantees.

As a result of development activities acquired in the Trammell Crow Company Acquisition, from time to time, we act as a general contractor with respect to construction projects. We do not consider these activities to be a material part of our business. In connection with these activities, we seek to subcontract construction work for certain projects to reputable subcontractors. Should construction defects arise relating to the underlying projects, we could potentially be liable to the client for the costs to repair such defects; we would generally look to the subcontractor that performed the work to remedy the defect. Our management does not expect to incur material losses with respect to construction defects.

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, 2007, we had committed $79.3 million to fund future co-investments.

19




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

12.   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, 2007, outstanding stock options granted under the 2001 stock incentive plan to acquire 6,495,477 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, was amended and restated on April 14, 2005 and was amended again on September 6, 2006. 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 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 or 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. 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.

As of March 31, 2007, 6,209,917 shares were subject to options issued under our 2004 stock incentive plan and 7,682,505 shares remained available for future grants under the 2004 stock incentive plan. Options granted under this plan during the three months ended March 31, 2007 have exercise prices in the range of $34.54 to $35.40 and vest and are exercisable in equal annual increments over three or four years from the date of grant.

20




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

12.   Stock-Based Compensation (Continued)

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

 

 

Shares

 

Weighted Average
Exercise Price

 

Outstanding at December 31, 2006

 

13,729,892

 

 

$

7.30

 

 

Exercised

 

(871,563

)

 

4.93

 

 

Granted

 

18,023

 

 

34.57

 

 

Forfeited

 

(170,958

)

 

5.65

 

 

Outstanding at March 31, 2007

 

12,705,394

 

 

$

7.53

 

 

Vested and expected to vest at March 31, 2007(1)

 

12,356,397

 

 

$

7.53

 

 

Exercisable at March 31, 2007

 

5,118,493

 

 

$

4.34

 

 


(1)          The expected to vest options are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options.

Options outstanding at March 31, 2007 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

 

6,495,477

 

 

5.8

 

 

 

$

1.92

 

 

 

 

3,628,104

 

 

$

1.92

 

 

 

 

$6.33 - $7.46

 

2,523,276

 

 

2.6

 

 

 

7.44

 

 

 

 

954,348

 

 

7.41

 

 

 

 

$11.10 - $15.43

 

2,713,234

 

 

5.4

 

 

 

15.22

 

 

 

 

527,509

 

 

15.11

 

 

 

 

$23.46 - $35.19

 

972,839

 

 

6.5

 

 

 

23.70

 

 

 

 

8,485

 

 

24.42

 

 

 

 

$35.40

 

568

 

 

6.8

 

 

 

35.40

 

 

 

 

47

 

 

35.40

 

 

 

 

 

 

12,705,394

 

 

5.1

 

 

 

$

7.53

 

 

$

338,713,449

 

5,118,493

 

 

$

4.34

 

 

$

152,819,429

 

 

At March 31, 2007, the aggregate intrinsic value and weighted average remaining contractual life for options vested and expected to vest were $330.2 million and 4.8 years, respectively.

In the fourth quarter of 2003, we adopted the fair value recognition provisions of 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.

In December 2004, the Financial Accounting Standards Board (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.

21




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

12.   Stock-Based Compensation (Continued)

In accordance with SFAS No. 123R, we estimate the fair value of our options using the Black-Scholes option-pricing model, which takes into account assumptions such as the dividend yield, the risk-free interest rate, the expected stock price volatility and the expected life of the options.

The total estimated grant date fair value of stock options that vested during the three months ended March 31, 2007 was $0.9 million. The weighted average fair value of options granted by us was $15.19 for the three months ended March 31, 2007. We did not grant any options during the three months ended March 31, 2006. 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 March 31,

 

 

 

2007

 

Dividend yield

 

 

0

%

 

Risk-free interest rate

 

 

4.52

%

 

Expected volatility

 

 

40.00

%

 

Expected life

 

 

5 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 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 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 Securities and Exchange Staff Accounting Bulletin No. 107.

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.

Total compensation expense related to stock options was $2.1 million and $1.7 million for the three months ended March 31, 2007 and 2006, respectively. In addition, during the three months ended March 31, 2007, we incurred $9.6 million of expense resulting from the acceleration of vesting of stock options in connection with the termination of duplicative employees as a result of the Trammell Crow Company Acquisition, which is included in merger-related charges in the accompanying consolidated statement of operations. At March 31, 2007, total unrecognized estimated compensation cost related to non-vested stock options was approximately $21.6 million, which is expected to be recognized over a weighted average period of approximately 2.7 years.

The total intrinsic value of stock options exercised during the three months ended March 31, 2007 and 2006 was $27.3 million and $17.8 million, respectively. We recorded cash received from stock option exercises of $4.3 million and $3.3 million and related tax benefits of $9.1 million and $6.3 million during the three months ended March 31, 2007 and 2006, respectively. Upon option exercise, we issue new shares

22




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

12.   Stock-Based Compensation (Continued)

of stock. Excess tax benefits exist 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 excess tax benefits as operating cash flows on our consolidated statements of cash flows. SFAS No. 123R requires the cash flows resulting from such excess tax benefits to be classified as financing cash flows. Under SFAS No. 123R, we have classified excess tax benefits of $9.1 million and $6.3 million for the three months ended March 31, 2007 and 2006, respectively, as financing cash inflows.

We have issued non-vested stock awards, including shares and stock units, in our Class A common stock to certain of our employees and members of our Board of Directors. During the three months ended March 31, 2007, we granted non-vested stock awards of 65,856, of which 57,902 shares were restricted stock awards which immediately vested at the date of grant, while the remainder vest in equal annual increments over three or four years from the date of grant. We did not grant any non-vested stock awards during the three months ended March 31, 2006. In addition, we granted 290,497 and 441,753 of non-vested stock units to certain of our employees during the three months ended March 31, 2007 and 2006, respectively. These non-vested stock units all vest in 2016. A summary of the status of our non-vested stock awards is presented in the table below:

 

 

Shares/Units

 

Weighted

Average Market
Value Per Share

 

Balance at December 31, 2006

 

 

1,881,669

 

 

 

$

23.97

 

 

Granted

 

 

356,353

 

 

 

34.54

 

 

Vested

 

 

(77,742

)

 

 

31.05

 

 

Forfeited

 

 

(2,475

)

 

 

15.43

 

 

Balance at March 31, 2007

 

 

2,157,805

 

 

 

$

25.47

 

 

 

Total compensation expense related to non-vested stock awards was $4.7 million for the three months ended March 31, 2007, which includes $2.0 million of compensation expense related to the 57,902 shares of restricted stock which immediately vested at the date of grant. In addition, during the three months ended March 31, 2007, we incurred $0.9 million of expense resulting from the acceleration of vesting of non-vested stock awards in connection with the termination of duplicative employees as a result of the Trammell Crow Company Acquisition, which is included in merger-related charges in the accompanying consolidated statement of operations. Total compensation expense related to non-vested stock awards was $0.5 million for the three months ended March 31, 2006.

23




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

13.   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 March 31,

 

 

 

2007

 

2006

 

 

 

Income

 

Shares

 

Per
Share
Amount

 

Income

 

Shares

 

Per
Share
Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

11,977

 

229,663,454

 

 

$

0.05

 

 

$

36,910

 

225,559,521

 

 

$

0.16

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

11,977

 

229,663,454

 

 

 

 

 

$

36,910

 

225,559,521

 

 

 

 

 

Dilutive effect of contingently issuable shares

 

  

 

545,785

 

 

 

 

 

 

158,229

 

 

 

 

 

Dilutive effect of stock options

 

 

6,723,001

 

 

 

 

 

 

7,231,014

 

 

 

 

 

Net income applicable to common stockholders

 

$

11,977

 

236,932,240

 

 

$

0.05

 

 

$

36,910

 

232,948,764

 

 

$

0.16

 

 

 

For the three months ended March 31, 2007, options to purchase 23,739 shares of common stock were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect. There were no anti-dilutive shares for the three months ended March 31, 2006.

14.   Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. In the accompanying consolidated balance sheets, accumulated other comprehensive loss consists of foreign currency translation adjustments, unrealized holding gains on available for sale securities, an adjustment related to the adoption of SFAS No. 158 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.

24




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

14.   Comprehensive Income (Continued)

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

 

 

Three Months
Ended March 31,

 

 

 

2007

 

2006

 

Net income

 

$

11,977

 

$

36,910

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation gains and other

 

2,495

 

2,509

 

Unrealized holding gains on available for sale securities, net of $738 of tax

 

1,020

 

 

Total other comprehensive income

 

3,515

 

2,509

 

Comprehensive income

 

$

15,492

 

$

39,419

 

 

15.   Pensions

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

 

 

Three Months
Ended March 31,

 

 

 

2007

 

2006

 

Service cost

 

$

1,932

 

$

1,705

 

Interest cost

 

4,072

 

3,379

 

Expected return on plan assets

 

(4,291

)

(3,491

)

Amortization of prior service benefit

 

(217

)

(114

)

Amortization of unrecognized net loss

 

467

 

363

 

Net periodic pension cost

 

$

1,963

 

$

1,842

 

 

We contributed $2.6 million to fund our pension plans during the three months ended March 31, 2007. We are currently in the process of amending these plans. As a result, the expected contribution amount for the year ended December 31, 2007 is not currently determinable.

25




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

16.   Merger-Related Charges

In connection with the Trammell Crow Company Acquisition, we recorded merger-related charges of $31.9 million for the three months ended March 31, 2007. These charges primarily relate to the termination of employees, which have become duplicative as a result of the Trammell Crow Company Acquisition. Our merger-related charges consisted of the following (dollars in thousands):

 

 

 

 

 

 

To be

 

 

 

2007

 

Utilized

 

Utilized at

 

 

 

Charge

 

to Date

 

March 31, 2007

 

Severance

 

$

29,790

 

$

(20,223

)

 

$

9,567

 

 

Costs associated with exiting contracts

 

1,047

 

(1,047

)

 

 

 

Other

 

1,018

 

(926

)

 

92

 

 

Total merger-related charges

 

$

31,855

 

$

(22,196

)

 

$

9,659

 

 

 

17.   Sale of Savills plc

In January 2007, we sold Trammell Crow Company’s approximately 19% ownership interest in Savills plc and generated a pre-tax loss of $34.9 million during the three months ended March 31, 2007, which was largely driven by stock price depreciation at the date of sale as compared to December 31, 2006 when the investment was marked to market. The loss is included in other loss in the accompanying consolidated statements of operations. We received approximately $311.0 million of pre-tax proceeds from the sale, net of selling expenses.

18.   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 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

 

 

 

To be

 

 

 

Balance At

 

2007

 

Utilized at

 

 

 

December 31, 2006

 

Utilization

 

March 31, 2007

 

Lease termination costs

 

 

$

9,976

 

 

 

$

(909

)

 

 

$

9,067

 

 

Legal settlements anticipated

 

 

2,246

 

 

 

(24

)

 

 

2,222

 

 

 

 

 

$

12,222

 

 

 

$

(933

)

 

 

$

11,289

 

 

 

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

 

 

 

To be

 

 

 

Balance At

 

2007

 

Utilized at

 

 

 

December 31, 2006

 

Utilization

 

March 31, 2007

 

Lease termination costs

 

 

$

13,997

 

 

 

$

(734

)

 

 

$

13,263

 

 

 

26




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

19.   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 $1.0 billion at both March 31, 2007 and December 31, 2006.

20.   Fair Value of Financial Instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. 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.

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 10).

Trading Securities:   These investments are carried at fair value as of March 31, 2007 and December 31, 2006. The substantial majority of this balance at December 31, 2006 represented an investment in Savills plc acquired as part of the Trammell Crow Company Acquisition, which was sold during the three months ended March 31, 2007.

Short-Term Borrowings:   The majority of this balance represents our revolving credit facility and the WaMu and JP Morgan warehouse lines of credit for CBRE Melody. Due to the variable interest rates of these instruments, fair value approximates carrying value (See Note 10).

9¾% Senior Notes:   Based on dealers’ quotes, the estimated fair value of the 9¾% senior notes was $3.5 million at both March 31, 2007 and December 31, 2006. Their actual carrying value totaled $3.3 million at both March 31, 2007 and December 31, 2006 (See Note 10).

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 10).

27




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

21.   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 10 for additional information).

The following condensed consolidating financial information includes:

(1)   Condensed consolidating balance sheets as of March 31, 2007 and December 31, 2006; condensed consolidating statements of operations for the three months ended March 31, 2007 and 2006; and condensed consolidating statements of cash flows for the three months ended March 31, 2007 and 2006, 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.

“Revenue” and “Cost of Services” have been increased from amounts previously reported for the three months ended March 31, 2006 (see Note 2).

28




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

21.   Guarantor and Nonguarantor Financial Statements (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2007
(Dollars in thousands)

 

 

 

 

 

 

Guarantor

 

Nonguarantor

 

 

 

Consolidated

 

 

 

Parent

 

CBRE

 

Subsidiaries

 

Subsidiaries

 

Elimination

 

Total

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3

 

$

74,472

 

 

$

141,556

 

 

 

$

130,317

 

 

$

 

 

$

346,348

 

 

Restricted cash

 

 

 

 

88,503

 

 

 

460

 

 

 

 

88,963

 

 

Receivables, less allowance for doubtful accounts

 

2

 

 

 

363,836

 

 

 

413,640

 

 

 

 

777,478

 

 

Warehouse receivables(a)

 

 

 

 

27,150

 

 

 

 

 

 

 

27,150

 

 

Deferred tax assets, net

 

275,692

 

 

 

 

 

 

 

 

 

 

275,692

 

 

Real estate under development

 

 

 

 

68,502

 

 

 

 

 

 

 

68,502

 

 

Real estate and other assets held for sale

 

 

 

 

37,170

 

 

 

16,085

 

 

 

 

53,255

 

 

Trading securities

 

 

 

 

1,619

 

 

 

 

 

 

 

1,619

 

 

Prepaid expenses and other current assets

 

46

 

2,593

 

 

104,408

 

 

 

41,561

 

 

 

 

148,608

 

 

Total Current Assets

 

275,743

 

77,065

 

 

832,744

 

 

 

602,063

 

 

 

 

1,787,615

 

 

Property and equipment, net

 

 

 

 

105,619

 

 

 

71,973

 

 

 

 

177,592

 

 

Goodwill

 

 

 

 

1,773,087

 

 

 

417,710

 

 

 

 

2,190,797

 

 

Other intangible assets, net

 

 

 

 

406,187

 

 

 

23,471

 

 

 

 

429,658

 

 

Deferred compensation assets

 

 

229,822

 

 

 

 

 

 

 

 

 

229,822

 

 

Investments in and advances to unconsolidated subsidiaries

 

 

 

 

109,763

 

 

 

119,970

 

 

 

 

229,733

 

 

Investments in consolidated subsidiaries

 

1,182,451

 

2,695,567

 

 

614,013

 

 

 

 

 

(4,492,031

)

 

 

 

Inter-company loan receivable

 

18,057

 

470,139

 

 

 

 

 

28,988

 

 

(517,184

)

 

 

 

Real estate under development

 

 

 

 

175,583

 

 

 

 

 

 

 

175,583

 

 

Real estate held for investment

 

 

 

 

226,328

 

 

 

 

 

 

 

226,328

 

 

Other assets, net

 

 

28,574

 

 

97,824

 

 

 

25,216

 

 

 

 

151,614

 

 

Total Assets

 

$

1,476,251

 

$

3,501,167

 

 

$

4,341,148

 

 

 

$

1,289,391

 

 

$

(5,009,215

)

 

$

5,598,742

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

 

$

6,196

 

 

$

217,636

 

 

 

$

162,326

 

 

$

 

 

$

386,158

 

 

Deferred purchase consideration

 

 

 

 

38,700

 

 

 

 

 

 

 

38,700

 

 

Compensation and employee benefits payable

 

 

 

 

202,040

 

 

 

145,140

 

 

 

 

347,180

 

 

Accrued bonus and profit sharing