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, 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)

 

 

 

11150 Santa Monica Boulevard, Suite 1600

 

 

Los Angeles, California

 

90025

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(310) 405-8900

 

 

(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, 2007 was 229,277,183.

 




FORM 10-Q

June 30, 2007

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

 

 

 

Page

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2007 and December 31, 2006 (Unaudited)

 

 

3

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006 (Unaudited)

 

 

4

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 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

 

 

32

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

59

 

 

Item 4.

 

Controls and Procedures

 

 

60

 

 

PART IIOTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

61

 

 

Item 1A.

 

Risk Factors

 

 

61

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

61

 

 

Item 5.

 

Other Information

 

 

62

 

 

Item 6.

 

Exhibits

 

 

63

 

 

Signatures

 

 

64

 

 

 

2




CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share data)

 

 

June 30,
2007

 

December 31,
2006

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

438,168

 

 

$

244,476

 

 

Restricted cash

 

77,576

 

 

212,938

 

 

Receivables, less allowance for doubtful accounts of $29,303 and $22,190 at June 30, 2007 and December 31, 2006, respectively

 

903,329

 

 

880,809

 

 

Warehouse receivables

 

164,284

 

 

103,992

 

 

Prepaid expenses

 

82,006

 

 

75,558

 

 

Deferred tax assets, net

 

150,292

 

 

143,024

 

 

Real estate under development

 

120,010

 

 

40,706

 

 

Real estate and other assets held for sale

 

126,611

 

 

113,844

 

 

Trading securities

 

2,829

 

 

355,503

 

 

Other current assets

 

60,105

 

 

71,217

 

 

Total Current Assets

 

2,125,210

 

 

2,242,067

 

 

Property and equipment, net

 

184,128

 

 

180,546

 

 

Goodwill

 

2,181,201

 

 

2,188,352

 

 

Other intangible assets, net of accumulated amortization of $79,883 and $55,065 at June 30, 2007 and December 31, 2006, respectively

 

418,879

 

 

441,073

 

 

Deferred compensation assets

 

241,209

 

 

203,271

 

 

Investments in and advances to unconsolidated subsidiaries

 

233,739

 

 

227,799

 

 

Real estate under development

 

197,819

 

 

159,893

 

 

Real estate held for investment

 

216,045

 

 

149,805

 

 

Other assets, net

 

151,800

 

 

151,825

 

 

Total Assets

 

$

5,950,030

 

 

$

5,944,631

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

388,334

 

 

$

482,194

 

 

Deferred purchase consideration

 

35,703

 

 

159,676

 

 

Compensation and employee benefits payable

 

324,518

 

 

330,826

 

 

Accrued bonus and profit sharing

 

384,400

 

 

524,184

 

 

Income taxes payable

 

50,693

 

 

48,576

 

 

Short-term borrowings:

 

 

 

 

 

 

 

Warehouse lines of credit

 

164,284

 

 

103,992

 

 

Revolving line of credit

 

41,701

 

 

 

 

Other

 

61,277

 

 

22,216

 

 

Total short-term borrowings

 

267,262

 

 

126,208

 

 

Current maturities of long-term debt

 

11,632

 

 

11,836

 

 

Notes payable on real estate

 

229,252

 

 

133,037

 

 

Liabilities related to real estate and other assets held for sale

 

65,204

 

 

87,289

 

 

Other current liabilities

 

2,885

 

 

35,961

 

 

Total Current Liabilities

 

1,759,883

 

 

1,939,787

 

 

Long-Term Debt:

 

 

 

 

 

 

 

Senior secured term loans

 

1,931,500

 

 

2,062,000

 

 

9¾% senior notes

 

 

 

3,310

 

 

Other long-term debt

 

1,334

 

 

1,363

 

 

Total Long-Term Debt

 

1,932,834

 

 

2,066,673

 

 

Deferred compensation liability

 

250,872

 

 

225,179

 

 

Deferred tax liabilities, net

 

18,882

 

 

80,603

 

 

Pension liability

 

59,474

 

 

57,971

 

 

Non current tax liabilities

 

71,149

 

 

 

 

Notes payable on real estate

 

154,750

 

 

132,453

 

 

Other liabilities

 

170,430

 

 

182,188

 

 

Total Liabilities

 

4,418,274

 

 

4,684,854

 

 

Commitments and contingencies

 

 

 

 

 

Minority interest

 

162,759

 

 

78,136

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Class A common stock; $0.01 par value; 325,000,000 shares authorized; 229,162,067 and 227,474,835 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively

 

2,292

 

 

2,275

 

 

Additional paid-in capital

 

655,902

 

 

610,406

 

 

Notes receivable from sale of stock

 

(60

)

 

(60

)

 

Accumulated earnings

 

726,137

 

 

602,086

 

 

Accumulated other comprehensive loss

 

(15,274

)

 

(33,066

)

 

Total Stockholders’ Equity

 

1,368,997

 

 

1,181,641

 

 

Total Liabilities and Stockholders’ Equity

 

$

5,950,030

 

 

$

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenue

 

$

1,490,363

 

$

903,544

 

$

2,704,324

 

$

1,654,816

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

791,605

 

479,812

 

1,441,278

 

891,438

 

Operating, administrative and other

 

469,754

 

283,598

 

881,691

 

548,759

 

Depreciation and amortization

 

27,511

 

12,255

 

54,879

 

27,185

 

Merger-related charges

 

2,877

 

 

34,732

 

 

Operating income

 

198,616

 

127,879

 

291,744

 

187,434

 

Equity income from unconsolidated subsidiaries

 

25,915

 

8,428

 

30,164

 

16,841

 

Minority interest (income) expense

 

(165

)

1,580

 

2,735

 

1,809

 

Other loss

 

 

 

37,534

 

 

Interest income

 

5,972

 

2,976

 

12,985

 

6,566

 

Interest expense

 

42,173

 

13,352

 

84,155

 

27,287

 

Loss on extinguishment of debt

 

 

22,255

 

 

22,255

 

Income before provision for income taxes

 

188,495

 

102,096

 

210,469

 

159,490

 

Provision for income taxes

 

47,360

 

37,842

 

57,357

 

58,326

 

Net income

 

$

141,135

 

$

64,254

 

$

153,112

 

$

101,164

 

Basic income per share

 

$

0.61

 

$

0.28

 

$

0.67

 

$

0.45

 

Weighted average shares outstanding for basic income per share

 

230,543,095

 

225,964,727

 

230,105,706

 

225,763,242

 

Diluted income per share

 

$

0.59

 

$

0.27

 

$

0.65

 

$

0.43

 

Weighted average shares outstanding for diluted income per share

 

237,475,584

 

233,655,941

 

237,206,344

 

233,304,306

 

 

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,

 

 

 

2007

 

2006

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

153,112

 

$

101,164

 

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

 

 

 

 

 

Depreciation and amortization

 

54,879

 

27,185

 

Amortization and write-off of deferred financing costs

 

3,744

 

13,851

 

Amortization and write-off of long-term debt discount

 

 

1,648

 

Deferred compensation deferrals

 

22,043

 

14,560

 

Gain on sale of servicing rights and other assets

 

(2,030

)

(4,323

)

Loss on trading securities

 

33,654

 

 

Loss on interest rate swaps

 

3,880

 

 

Equity income from unconsolidated subsidiaries

 

(30,164

)

(16,841

)

Distribution of earnings from unconsolidated subsidiaries

 

29,968

 

14,089

 

In-kind distributions from unconsolidated subsidiaries

 

(2,710

)

 

Minority interest expense

 

2,735

 

1,809

 

Provision for doubtful accounts

 

8,070

 

1,434

 

Deferred income taxes

 

658

 

(3,301

)

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

 

22,593

 

4,842

 

Incremental tax benefit from stock options exercised

 

(15,111

)

(8,482

)

Tenant concessions received

 

4,989

 

5,809

 

Proceeds from sale of trading securities

 

320,047

 

 

(Increase) decrease in receivables

 

(7,401

)

19,183

 

Increase in deferred compensation assets

 

(37,938

)

(13,045

)

Decrease (increase) in prepaid expenses and other assets

 

4,321

 

(41,510

)

Increase in real estate held for sale and under development

 

(107,435

)

 

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

 

42,969

 

 

Decrease in accounts payable and accrued expenses

 

(106,399

)

(51,883

)

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

 

(160,559

)

(110,166

)

Decrease in income taxes payable

 

(30,988

)

(63,944

)

(Decrease) increase in other liabilities

 

(1,634

)

30,368

 

Other operating activities, net

 

598

 

83

 

Net cash provided by (used in) operating activities

 

205,891

 

(77,470

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(26,992

)

(27,958

)

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

 

(36,995

)

(49,527

)

Cash paid for acquisition of Trammell Crow Company

 

(124,732

)

 

Contributions to investments in unconsolidated subsidiaries, net

 

(14,754

)

(4,895

)

Proceeds from the sale of servicing rights and other assets

 

18,851

 

3,652

 

Additions to real estate held for investment

 

(73,454

)

 

Decrease in restricted cash

 

135,404

 

1,321

 

Other investing activities, net

 

14,129

 

(912

)

Net cash used in investing activities

 

(108,543

)

(78,319

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Repayment of senior secured term loans

 

(130,500

)

(265,250

)

Proceeds from revolving credit facility

 

73,186

 

278,000

 

Repayment of revolving credit facility

 

(34,638

)

(30,000

)

Repayment of 11¼% senior subordinated notes

 

 

(164,669

)

Repayment of 9¾% senior notes

 

(3,310

)

 

Proceeds from notes payable on real estate held for investment

 

63,835

 

 

Repayment of notes payable on real estate held for investment

 

(8,147

)

 

Proceeds from (repayment of) short-term borrowings and other loans, net

 

38,988

 

(5,139

)

Proceeds from exercise of stock options

 

8,160

 

4,444

 

Incremental tax benefit from stock options exercised

 

15,111

 

8,482

 

Minority interest contributions, net

 

74,653

 

8,827

 

Payment of deferred financing fees

 

(2,449

)

(5,099

)

Other financing activities, net

 

(551

)

(425

)

Net cash provided by (used in) financing activities

 

94,338

 

(170,829

)

Effect of currency exchange rate changes on cash and cash equivalents

 

2,006

 

4,618

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

193,692

 

(322,000

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

244,476

 

449,289

 

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

438,168

 

$

127,289

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

78,203

 

$

35,493

 

Income taxes, net of refunds

 

$

88,822

 

$

125,345

 

 

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 and six months ended June 30, 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,” we concluded that the accounting for certain reimbursements (primarily salaries and related charges) related to our 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 and six months ended June 30, 2006 to be consistent with the presentation for the three and six months ended June 30, 2007. As a result, amounts reflected as “Revenue” and “Cost of Services” in the consolidated statements of operations for the three and six months ended June 30, 2006 have been increased from the amounts previously reported by $67.3 million and $138.5 million, respectively. This reclassification had no impact on operating income, net income, earnings per share or stockholders’ equity.

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” or SFAS No. 150. Certain provisions of SFAS No. 150 would have required us to classify non-controlling interests in consolidated limited life subsidiaries as liabilities adjusted to their settlement values in our consolidated financial statements. In November 2003, the FASB indefinitely deferred application of the measurement and recognition provisions (but not the disclosure requirements)

7




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

2.        Basis of Presentation (Continued)

of SFAS No. 150 with respect to these non-controlling interests. As of June 30, 2007, the estimated settlement value of non-controlling interests in our consolidated limited life subsidiaries approximates the carrying value of $85.9 million, which is included in minority interest in the accompanying consolidated balance sheets, since the majority of the assets of our consolidated limited life subsidiaries were acquired in 2007. As of December 31, 2006, the estimated settlement value of non-controlling interests in our consolidated limited life subsidiaries was not significant.

3.        Trammell Crow Company Acquisition

On December 20, 2006, pursuant to the Trammell Crow Company Acquisition Agreement, by and among us, Merger Sub (our wholly owned subsidiary) and Trammell Crow Company, the Merger Sub was merged with and into Trammell Crow Company. 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

8




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

3.        Trammell Crow Company Acquisition (Continued)

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 liabilities and minority interest, may still be required. As of June 30, 2007, approximately $35.7 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 $35.7 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
June 30, 2007

 

Change of control payments

 

 

$

36,461

 

 

 

$

(35,727

)

 

 

$

 

 

 

$

(734

)

 

 

$

 

 

Costs associated with exiting contracts and other contractual obligations

 

 

29,635

 

 

 

(500

)

 

 

(1,666

)

 

 

(15,002

)

 

 

12,467

 

 

Severance

 

 

18,422

 

 

 

 

 

 

1,638

 

 

 

(9,950

)

 

 

10,110

 

 

Lease termination costs

 

 

11,085

 

 

 

 

 

 

(132

)

 

 

(1,322

)

 

 

9,631

 

 

Legal settlements anticipated

 

 

6,212

 

 

 

 

 

 

(594

)

 

 

(1,046

)

 

 

4,572

 

 

 

 

 

$

101,815

 

 

 

$

(36,227

)

 

 

$

(754

)

 

 

$

(28,054

)

 

 

$

36,780

 

 

 

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 the three and six months ended June 30, 2006 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
June 30, 2006

 

Six Months Ended
June 30, 2006

 

Revenue

 

 

$

1,142,608

 

 

 

$

2,109,652

 

 

Operating income

 

 

126,760

 

 

 

164,087

 

 

Net income

 

 

46,042

 

 

 

47,797

 

 

Basic income per share

 

 

$

0.20

 

 

 

$

0.21

 

 

Weighted average shares outstanding for basic income per share

 

 

225,964,727

 

 

 

225,763,242

 

 

Diluted income per share

 

 

$

0.19

 

 

 

$

0.20

 

 

Weighted average shares outstanding for diluted income per share

 

 

233,655,941

 

 

 

233,304,306

 

 

 

4.        Restricted Cash

Included in the accompanying consolidated balance sheets as of June 30, 2007 and December 31, 2006, is restricted cash of $77.6 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.).

5.        Goodwill and Other Intangible Assets

The following table summarizes the changes in the carrying amount of goodwill for the six months ended June 30, 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

 

(12,154

)

4,868

 

37

 

 

 

 

 

186

 

 

(7,063

)

Adoption of FIN 48 (see Note 22)

 

(5,359

)

 

 

 

 

 

 

 

 

(5,359

)

Foreign exchange movement

 

605

 

3,217

 

1,331

 

 

118

 

 

 

 

 

5,271

 

Balance at June 30, 2007

 

$

1,700,426

 

$

335,943

 

$

33,449

 

 

$

38,280

 

 

 

$

73,103

 

 

$

2,181,201

 

 

10




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

5.        Goodwill and Other Intangible Assets (Continued)

Other intangible assets totaled $418.9 million and $441.1 million, net of accumulated amortization of $79.9 million and $55.1 million, as of June 30, 2007 and December 31, 2006, respectively, and are comprised of the following (dollars in thousands):

 

As of June 30, 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

 

 

$

(5,989

)

 

$

220,000

 

 

$

(60

)

 

Backlog and incentive fees

 

46,428

 

 

(33,503

)

 

44,630

 

 

(18,780

)

 

Management contracts

 

29,273

 

 

(23,458

)

 

28,585

 

 

(21,333

)

 

Loan servicing rights

 

21,946

 

 

(10,109

)

 

22,143

 

 

(9,365

)

 

Other

 

13,589

 

 

(6,824

)

 

13,254

 

 

(5,527

)

 

 

 

$

331,236

 

 

$

(79,883

)

 

$

328,612

 

 

$

(55,065

)

 

Total intangible assets

 

$

498,762

 

 

$

(79,883

)

 

$

496,138

 

 

$

(55,065

)

 

 

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. In connection with the Trammell Crow Company Acquisition, an $84.0 million trade name was separately identified, which represents the 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.

11




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

5.        Goodwill and Other Intangible Assets (Continued)

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 $11.5 million and $1.9 million for the three months ended June 30, 2007 and 2006, respectively, and $23.8 million and $6.9 million for the six months ended June 30, 2007 and 2006, respectively. The estimated annual amortization expense for each of the years ending December 31, 2007 through December 31, 2011 approximates $47.2 million, $18.1 million, $16.5 million, $16.0 million and $14.1 million, respectively.

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Development Services:

 

 

 

 

 

 

 

 

 

Revenue

 

$

15,506

 

$

 

$

27,105

 

$

 

Operating income

 

$

27,990

 

$

 

$

31,339

 

$

 

Net income

 

$

23,008

 

$

 

$

21,713

 

$

 

Other:

 

 

 

 

 

 

 

 

 

Revenue

 

$

163,624

 

$

155,990

 

$

442,925

 

$

258,374

 

Operating income

 

$

11,422

 

$

31,172

 

$

62,258

 

$

56,556

 

Net income (loss)

 

$

9,759

 

$

(91,384

)

$

54,681

 

$

105,029

 

Total:

 

 

 

 

 

 

 

 

 

Revenue

 

$

179,130

 

$

155,990

 

$

470,030

 

$

258,374

 

Operating income

 

$

39,412

 

$

31,172

 

$

93,597

 

$

56,556

 

Net income (loss)

 

$

32,767

 

$

(91,384

)

$

76,394

 

$

105,029

 

 

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. We have agreements to provide development and brokerage services to certain of our unconsolidated development subsidiaries on an arm’s length basis and earned revenues from these unconsolidated subsidiaries.

12




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

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 June 30, 2007, or sold in the six months ended June 30, 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.

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

 

 

June 30,
2007

 

December 31,
2006

 

Assets:

 

 

 

 

 

 

 

Real estate held for sale (see Note 8)

 

$

122,132

 

 

$

109,454

 

 

Other current assets

 

514

 

 

2,775

 

 

Other assets

 

3,965

 

 

1,615

 

 

Total real estate and other assets held for sale

 

126,611

 

 

113,844

 

 

Liabilities:

 

 

 

 

 

 

 

Accrued expenses

 

3,924

 

 

5,478

 

 

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

 

60,890

 

 

81,543

 

 

Other current liabilities

 

217

 

 

185

 

 

Other liabilities

 

173

 

 

83

 

 

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

 

65,204

 

 

87,289

 

 

Net real estate and other assets held for sale

 

$

61,407

 

 

$

26,555

 

 

 

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 21). Real estate owned by us consisted of the following (dollars in thousands):

 

 

June 30,
2007

 

December 31,
2006

 

Real estate under development (current)

 

$

120,010

 

 

$

40,706

 

 

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

 

122,132

 

 

109,454

 

 

Real estate under development (non current)

 

197,819

 

 

159,893

 

 

Real estate held for investment(1)

 

216,045

 

 

149,805

 

 

Total real estate(2)

 

$

656,006

 

 

$

459,858

 

 


(1)          Net of accumulated depreciation of $2.2 million at June 30, 2007.

13




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

8.        Real Estate (Continued)

(2)          Includes balances for lease intangibles and tenant origination costs of $7.8 million and $3.9 million, respectively, at June 30, 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.

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):

 

 

June 30,
2007

 

December 31,
2006

 

Current portion of notes payable on real estate

 

$

229,252

 

 

$

133,037

 

 

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

 

60,890

 

 

81,543

 

 

Total notes payable on real estate, current portion

 

290,142

 

 

214,580

 

 

Notes payable on real estate, non current portion

 

154,750

 

 

132,453

 

 

Total notes payable on real estate

 

$

444,892

 

 

$

347,033

 

 

 

At June 30, 2007, $16.3 million of the current portion and $0.9 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 primary 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 $4.1 million and $6.1 million at June 30, 2007 and December 31, 2006, respectively.

10.          Debt

We had short-term borrowings of $267.3 million and $126.2 million with related average interest rates of 6.3% and 5.8% as of June 30, 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.

14




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

10.          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, (2) a $1.1 billion tranche A term loan facility, requiring quarterly principal payments beginning March 31, 2009 (previously set to commence on March 31, 2008, but adjusted as a result of our prepayment of all of the 2008 required payments in the current year) 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. The 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. Additionally, outstanding borrowings under these sub-facilities may be up to 5.0% higher as allowed under the currency fluctuation provision contained in the Credit Agreement.

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 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 June 30, 2007, we had $41.7 million of revolving credit facility principal outstanding with a related weighted average interest rate of 7.7%, which is included in short-term borrowings in the accompanying consolidated balance sheets. As of June 30, 2007, letters of credit totaling $11.6 million were outstanding. These 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%. During the six months ended June 30, 2007, we repaid $125.0 million and $5.5 million of our tranche A and tranche B loan facilities, respectively. As of June 30, 2007 and December 31, 2006, we had $848.0 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

15




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

10.          Debt (Continued)

consolidated statement of operations. There was no hedge ineffectiveness for the period from March 20, 2007 through June 30, 2007. As of June 30, 2007, the fair value of these interest rate swap agreements was $4.5 million and is included in other assets with the corresponding offset to accumulated other comprehensive income included in the accompanying consolidated balance sheets.

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 notes, which were 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 were 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 were jointly and severally guaranteed on a senior basis by us and substantially all of our domestic subsidiaries. Interest accrued at a rate of 9¾% per year and was payable semi-annually in arrears on May 15 and November 15. 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, which resulted in the repurchase of all but $3.3 million of these notes. The remaining $3.3 million of the 9¾% senior notes were redeemable at our option, in whole or in part, on or after May 15, 2007 at 104.875% of par on that date, which we elected to redeem during the three months ended June 30, 2007.

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

16




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

10.          Debt (Continued)

by a written amendment. As of June 30, 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 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 six months ended June 30, 2007, we had a maximum of $188.1 million warehouse lines of credit principal outstanding. As of June 30, 2007 and December 31, 2006, we had $164.3 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 $164.3 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 June 30, 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 was to be due and payable on demand, or if no demand was 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. Effective May 1, 2007, CBRE Melody executed an amendment, which increased the revolving credit note to $100.0 million and extended the maturity date to April 30, 2008. As of June 30, 2007 and December 31, 2006, there were no amounts outstanding under this revolving credit note.

On April 30, 2007, Trammell Crow Company Acquisitions II, L.P. (Acquisitions II), a legal entity within our Development Services segment that we consolidate, entered into a $100.0 million revolving credit agreement with WestLB AG, as administrative agent for a lender group. Borrowings under the

17




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

10.          Debt (Continued)

credit agreement will be used to fund acquisitions of real estate prior to receipt of capital contributions of Acquisitions II investors and permanent project financing. This agreement bears interest at the daily British Bankers Association LIBOR rate plus 0.65% and expires on April 30, 2010. Subject to certain conditions, Acquisitions II can extend the maturity date of the credit facility for an additional term of not longer than twelve months and may increase the maximum commitment to an amount not exceeding $150.0 million. Borrowings under the line are non-recourse to us and are secured by the capital commitments of the investors in Acquisitions II. As of June 30, 2007, there was $47.8 million outstanding under this revolving credit note, which is included in short-term borrowings 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. 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 June 30, 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 now consolidate IKOMA’s financial statements, which included debt. IKOMA utilized short-term borrowings to assist in funding its working capital requirements. As of June 30, 2007, there was no amount of outstanding debt for IKOMA. As of December 31, 2006, IKOMA had $6.7 million 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 June 30, 2007 and December 31, 2006, $2.1 million and $2.2 million, respectively, of the acquisition loan notes were outstanding and are included in short-term borrowings in the accompanying consolidated balance sheets.

A significant number of our subsidiaries in Europe have had a Euro cash pool loan since 2001, which is used to fund their short-term liquidity needs. The Euro cash pool loan is an overdraft line for our European operations issued by HSBC Bank. The Euro cash pool loan has no stated maturity date and bears interest at varying rates based on a base rate as defined by HSBC Bank plus 2.5%. As of June 30, 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.

18




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

11.          Commitments and Contingencies (Continued)

We had outstanding letters of credit totaling $10.4 million as of June 30, 2007, excluding letters of credit related to our subsidiaries’ outstanding reserves for claims under certain insurance programs and indebtedness. These letters of credit are primarily executed by us 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 June 30, 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 are made by us 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. While there can be no assurance, we do 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 and also look to insurance policies that cover this work. While there can be no assurance, we do 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 June 30, 2007, we had committed $48.9 million to fund future co-investments.

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

19




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

12.          Stock-Based Compensation (Continued)

remain available for issuance under it. However, as of June 30, 2007, outstanding stock options granted under the 2001 stock incentive plan to acquire 6,078,694 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 and June 1, 2007. 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, 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 June 30, 2007, 5,954,085 shares were subject to options issued under our 2004 stock incentive plan and 7,686,009 shares remained available for future grants under the 2004 stock incentive plan.  Options granted under this plan during the six months ended June 30, 2007 have exercise prices in the range of $34.54 to $36.78, of which 17,455 shares vest and are exercisable in equal annual increments over four years from the date of grant and 12,799 shares vest and are exercisable in equal quarterly increments over three 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

 

(1,505,727

)

 

5.42

 

 

Granted

 

30,254

 

 

35.46

 

 

Forfeited

 

(221,640

)

 

6.38

 

 

Outstanding at June 30, 2007

 

12,032,779

 

 

$

7.63

 

 

Vested and expected to vest at June 30, 2007(1)

 

11,741,452

 

 

$

7.63

 

 

Exercisable at June 30, 2007

 

4,749,594

 

 

$

4.20

 

 


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

Options outstanding at June 30, 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

 

 

6,078,694

 

 

 

5.5

 

 

 

$

1.92

 

 

 

 

 

3,413,155

 

 

 

$

1.92

 

 

 

 

$6.33 - $7.46

 

 

2,416,815

 

 

 

2.4

 

 

 

7.44

 

 

 

 

 

888,315

 

 

 

7.40

 

 

 

 

$11.10 - $15.43

 

 

2,579,672

 

 

 

5.1

 

 

 

15.21

 

 

 

 

 

443,336

 

 

 

15.04

 

 

 

 

$23.46 - $34.54

 

 

944,799

 

 

 

6.2

 

 

 

23.70

 

 

 

 

 

4,695

 

 

 

25.85

 

 

 

 

$35.40 - $36.78

 

 

12,799

 

 

 

6.9

 

 

 

36.72

 

 

 

 

 

93

 

 

 

35.40

 

 

 

 

 

 

 

12,032,779

 

 

 

4.9

 

 

 

$

7.63

 

 

$

347,420,636

 

 

4,749,594

 

 

 

$

4.20

 

 

$

153,432,883

 

 

At June 30, 2007, the aggregate intrinsic value and weighted average remaining contractual life for options vested and expected to vest were $339.7 million and 4.9 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 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 six months ended June 30, 2007 was $1.4 million. The weighted average fair value of options granted by us was $16.43 and $10.72 for the three months ended June 30, 2007 and 2006, respectively, and $15.69 and $10.72 for the six months ended June 30, 2007 and 2006, 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,

 

 

 

2007

 

2006

 

2007

 

2006

 

Dividend yield

 

0

%

0

%

0

%

0

%

Risk-free interest rate

 

4.92

%

4.91

%

4.68

%

4.91

%

Expected volatility

 

40.00

%

36.20

%

40.00

%

36.20

%

Expected life

 

5 years

 

5 years

 

5 years

 

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 $1.8 million for the three months ended June 30, 2007 and 2006, respectively, and $4.2 million and $3.5 million for the six months ended June 30, 2007 and 2006, respectively. In addition, during the three and six months ended June 30, 2007, we incurred $0.2 million and $9.8 million, respectively, 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 for the three and six months ended June 30, 2007. At June 30, 2007, total unrecognized estimated compensation cost related to non-vested stock options was approximately $19.7 million, which is expected to be recognized over a weighted average period of approximately 2.4 years.

The total intrinsic value of stock options exercised during the six months ended June 30, 2007 and 2006 was $46.8 million and $28.2 million, respectively. We recorded cash received from stock option

22




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

12.          Stock-Based Compensation (Continued)

exercises of $8.2 million and $4.4 million and related tax benefits of $15.1 million and $8.5 million during the six months ended June 30, 2007 and 2006, respectively. Upon option exercise, we issue new shares 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 $15.1 million and $8.5 million for the six months ended June 30, 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 six months ended June 30, 2007, we granted non-vested stock awards of 74,415 shares, of which 57,902 shares were restricted stock awards which immediately vested at the date of grant, 7,670 shares vest in equal annual increments over four years from the date of grant and 8,843 shares vest in three years from the date of grant. During the six months ended June 30, 2006, we granted non-vested stock awards of 7,792 shares, which vest in three years from the date of grant. In addition, we granted 290,497 and 441,753 of non-vested stock units to certain of our employees during the six months ended June 30, 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

 

 

364,912

 

 

 

34.59

 

 

Vested

 

 

(115,109

)

 

 

24.40

 

 

Forfeited

 

 

(9,026

)

 

 

19.83

 

 

Balance at June 30, 2007

 

 

2,122,446

 

 

 

$

25.79

 

 

 

Total compensation expense related to non-vested stock awards was $2.7 million and $7.4 million, respectively, for the three and six months ended June 30, 2007. This includes $2.0 million of compensation expense related to the 57,902 shares of restricted stock which immediately vested at the date of grant during the six months ended June 30, 2007. In addition, during the three and six months ended June 30, 2007, we incurred $0.1 million and $1.0 million, respectively, 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 $0.9 million and $1.4 million, respectively for the three and six months ended June 30, 2006. At June 30, 2007, total unrecognized estimated compensation cost related to non-vested stock awards was approximately $46.9 million, which is expected to be recognized over a weighted average period of approximately 5.2 years.

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 June 30,

 

 

 

2007

 

2006

 

 

 

Income

 

Shares

 

Per
Share
Amount

 

Income

 

Shares

 

Per
Share
Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

141,135

 

230,543,095

 

 

$

0.61

 

 

$

64,254

 

225,964,727

 

 

$

0.28

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

141,135

 

230,543,095

 

 

 

 

 

$

64,254

 

225,964,727

 

 

 

 

 

Dilutive effect of contingently issuable shares

 

 

636,270

 

 

 

 

 

 

238,009

 

 

 

 

 

Dilutive effect of stock options

 

 

6,296,219

 

 

 

 

 

 

7,453,205

 

 

 

 

 

Net income applicable to common stockholders

 

$

141,135

 

237,475,584

 

 

$

0.59

 

 

$

64,254

 

233,655,941

 

 

$

0.27

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

Income

 

Shares

 

Per
Share
Amount

 

Income

 

Shares

 

Per
Share
Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

153,112

 

230,105,706

 

 

$

0.67

 

 

$

101,164

 

225,763,242

 

 

$

0.45

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

153,112

 

230,105,706

 

 

 

 

 

$

101,164

 

225,763,242

 

 

 

 

 

Dilutive effect of contingently issuable shares

 

 

591,028

 

 

 

 

 

 

198,340

 

 

 

 

 

Dilutive effect of stock options

 

 

6,509,610

 

 

 

 

 

 

7,342,724

 

 

 

 

 

Net income applicable to common stockholders

 

$

153,112

 

237,206,344

 

 

$

0.65

 

 

$

101,164

 

233,304,306

 

 

$

0.43

 

 

 

24




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

13.          Earnings Per Share (Continued)

For the three and six months ended June 30, 2007, options to purchase 35,970 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 and six months ended June 30, 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.

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

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income

 

$

141,135

 

$

64,254

 

$

153,112

 

$

101,164

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation gains and other

 

5,825

 

5,693

 

8,055

 

8,202

 

Unrealized gains on interest rate swaps, net

 

8,021

 

 

8,286

 

 

Unrealized holding (losses) gains on available for sale securities, net

 

(83

)

 

937

 

 

Total other comprehensive income

 

13,763

 

5,693

 

17,278

 

8,202

 

Comprehensive income

 

$

154,898

 

$

69,947

 

$

170,390

 

$

109,366

 

 

25




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

15.          Pensions

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

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Service cost

 

$

1,920

 

$

1,666

 

$

3,852

 

$

3,371

 

Interest cost

 

4,137

 

3,522

 

8,209

 

6,901

 

Expected return on plan assets

 

(4,364

)

(3,638

)

(8,655

)

(7,129

)

Amortization of prior service benefit

 

(220

)

(119

)

(437

)

(233

)

Amortization of unrecognized net loss

 

475

 

378

 

942

 

741

 

Net periodic pension cost

 

$

1,948

 

$

1,809

 

$

3,911

 

$

3,651

 

 

We contributed $2.0 million and $4.6 million to fund our pension plans during the three and six months ended June 30, 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.

16.          Merger-Related Charges

In connection with the Trammell Crow Company Acquisition, we recorded merger-related charges of $2.9 million and $34.7 million for the three and six months ended June 30, 2007. These charges primarily relate to the termination of employees, who have become duplicative as a result of the Trammell Crow Company Acquisition. Our merger-related charges consisted of the following (dollars in thousands):

 

 

2007
Charge

 

Utilized
to Date

 

To be
Utilized at
June 30, 2007

 

Severance

 

$

31,325

 

$

(28,729

)

 

$

2,596

 

 

Costs associated with exiting contracts

 

1,047

 

(1,047

)

 

 

 

Lease termination costs

 

1,022

 

 

 

1,022

 

 

Other

 

1,338

 

(1,338

)

 

 

 

Total merger-related charges

 

$

34,732

 

$

(31,114

)

 

$

3,618

 

 

 

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 six months ended June 30, 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 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

26




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

18.          Liabilities Related to the Insignia Acquisition (Continued)

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, 2006

 

2007
Utilization

 

To be
Utilized at
June 30, 2007

 

Lease termination costs

 

 

$

9,976

 

 

 

$

(1,843

)

 

 

$

8,133

 

 

Legal settlements anticipated

 

 

2,246

 

 

 

(46

)

 

 

2,200

 

 

 

 

 

$

12,222

 

 

 

$

(1,889

)

 

 

$

10,333

 

 

 

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, 2006

 

2007
Utilization

 

To be
Utilized at
June 30, 2007

 

Lease termination costs

 

 

$

13,997

 

 

 

$

(1,604

)

 

 

$

12,393

 

 

 

 

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 $1.2 billion and $1.0 billion at June 30, 2007 and December 31, 2006, respectively.

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 for our wholly-owned subsidiary, CBRE Melody (See Note 10).

27




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

20.          Fair Value of Financial Instruments (Continued)

Trading Securities:   These investments are carried at fair value as of June 30, 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 six months ended June 30, 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).

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).

21.          Industry Segments

We report our operations through five segments. The segments are as follows:  (1) Americas, (2) EMEA, (3) Asia Pacific, (4) Global Investment Management and (5) Development Services.

The Americas segment is our largest segment of operations and provides a comprehensive range of services throughout the U.S. and in the largest regions of Canada, Mexico and other selected parts of Latin America. The primary services offered consist of the following:  real estate services, mortgage loan origination and servicing, valuation services, asset services and corporate services.

Our EMEA and Asia Pacific segments provide services similar to the Americas business segment, excluding mortgage loan origination and servicing. The EMEA segment has operations primarily in Europe, while the Asia Pacific segment has operations primarily in Asia, Australia and New Zealand.

Our Global Investment Management business provides investment management services to clients seeking to generate returns and diversification through investments in real estate in the U.S., Europe and Asia.

Our Development Services business consists of real estate development and investment activities primarily in the U.S., which we acquired in the Trammell Crow Company Acquisition on December 20, 2006.

28




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

21.          Industry Segments (Continued)

Summarized financial information by segment is as follows (dollars in thousands):

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenue

 

 

 

 

 

 

 

 

 

Americas

 

$

934,018

 

$

597,169

 

$

1,725,903

 

$

1,090,506

 

EMEA

 

330,813

 

192,164

 

556,166

 

356,888

 

Asia Pacific

 

121,760

 

87,195

 

215,762

 

150,013

 

Global Investment Management

 

83,838

 

27,016

 

169,428

 

57,409

 

Development Services

 

19,934

 

 

37,065

 

 

 

 

$

1,490,363

 

$

903,544

 

$

2,704,324

 

$

1,654,816

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

Americas

 

$

92,216

 

$

84,046

 

$

113,835

 

$

127,516

 

EMEA

 

64,489

 

32,461

 

98,125

 

46,487

 

Asia Pacific

 

24,598

 

12,349

 

34,534

 

13,057

 

Global Investment Management

 

28,538

 

(977

)

67,205

 

374

 

Development Services

 

(11,225

)

 

(21,955

)

 

 

 

198,616

 

127,879

 

291,744

 

187,434

 

Equity income (loss) from unconsolidated subsidiaries

 

 

 

 

 

 

 

 

 

Americas

 

5,379

 

3,279

 

9,642

 

6,594

 

EMEA

 

237

 

655

 

632

 

654

 

Asia Pacific

 

(15

)

56

 

(18

)

414

 

Global Investment Management

 

12,071

 

4,438

 

11,756

 

9,179

 

Development Services

 

8,243

 

 

8,152

 

 

 

 

25,915

 

8,428

 

30,164

 

16,841

 

Minority interest expense (income)

 

 

 

 

 

 

 

 

 

Americas

 

214

 

166

 

484