Form 10-Q
Table of Contents

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 September 30, 2004

 

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

 

For the Transition Period from                      to                     

 

Commission File Number 001-32205

 


 

CB RICHARD ELLIS GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   94-3391143
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)

865 South Figueroa Street, Suite 3400

Los Angeles, California

  90017
(Address of principal executive offices)   (Zip Code)
(213) 613-3226    
(Registrant’s telephone number, including area code)  

(Former name, former address and

former fiscal year if changed since last report)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

 

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

 

The number of shares of Class A common stock outstanding at October 29, 2004 was 70,438,865.

 



Table of Contents

FORM 10-Q

 

September 30, 2004

 

TABLE OF CONTENTS

 

          Page

PART I—FINANCIAL INFORMATION

    

Item 1.

   Financial Statements     
     Consolidated Balance Sheets at September 30, 2004 (Unaudited) and December 31, 2003    3
     Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 (Unaudited)    4
     Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (Unaudited)    5
     Notes to Consolidated Financial Statements (Unaudited)    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    28

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    49

Item 4.

   Controls and Procedures    50

PART II—OTHER INFORMATION

    

Item 1.

   Legal Proceedings    50

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    50

Item 6.

   Exhibits    51

Signatures

   52

 

2


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

    September 30,
2004


    December 31,
2003


 
    (Unaudited)        
ASSETS                

Current Assets:

               

Cash and cash equivalents

  $ 147,925     $ 163,881  

Restricted cash

    10,614       14,899  

Receivables, less allowance for doubtful accounts of $15,557 and $16,181 at September 30, 2004 and December 31, 2003, respectively

    276,343       322,416  

Warehouse receivable

    111,840       230,790  

Prepaid expenses

    24,308       22,854  

Deferred tax assets, net

    62,832       57,681  

Other current assets

    41,539       26,461  
   


 


Total Current Assets

    675,401       838,982  

Property and equipment, net

    128,076       113,569  

Goodwill

    830,723       819,558  

Other intangible assets, net of accumulated amortization of $89,113 and $73,449 at September 30, 2004 and December 31, 2003, respectively

    117,295       131,731  

Deferred compensation assets

    79,461       76,389  

Investments in and advances to unconsolidated subsidiaries

    83,537       68,361  

Deferred tax assets, net

    30,636       32,179  

Other assets, net

    62,218       132,712  
   


 


Total Assets

  $ 2,007,347     $ 2,213,481  
   


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                

Current Liabilities:

               

Accounts payable and accrued expenses

  $ 170,130     $ 189,787  

Compensation and employee benefits payable

    156,233       148,874  

Accrued bonus and profit sharing

    143,585       200,343  

Short-term borrowings:

               

Warehouse line of credit

    111,840       230,790  

Other

    26,396       39,347  
   


 


Total short-term borrowings

    138,236       270,137  

Current maturities of long-term debt

    13,021       11,285  

Other current liabilities

    13,470       12,991  
   


 


Total Current Liabilities

    634,675       833,417  

Long-Term Debt:

               

11 1/4% senior subordinated notes, net of unamortized discount of $2,397 and $2,827 at September 30, 2004 and December 31, 2003, respectively

    204,972       226,173  

Senior secured term loan

    268,200       287,500  

9 3/4% senior notes

    130,000       200,000  

16% senior notes, net of unamortized discount of $2,844 at December 31, 2003

    —         35,472  

Other long-term debt

    877       42,275  
   


 


Total Long-Term Debt

    604,049       791,420  

Deferred compensation liability

    146,709       138,037  

Pension liability

    36,565       35,998  

Other liabilities

    100,434       75,024  
   


 


Total Liabilities

    1,522,432       1,873,896  

Minority interest

    6,667       6,656  

Commitments and contingencies

               

Stockholders’ Equity:

               

Class A common stock; $0.01 par value; 325,000,000 shares authorized; 70,195,909 and 7,176,396 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively

    702       72  

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

    —         534  

Additional paid-in capital

    509,288       359,334  

Notes receivable from sale of stock

    (5,058 )     (4,680 )

Accumulated (deficit) earnings

    (259 )     1,449  

Accumulated other comprehensive loss

    (26,425 )     (23,780 )
   


 


Total Stockholders’ Equity

    478,248       332,929  
   


 


Total Liabilities and Stockholders’ Equity

  $ 2,007,347     $ 2,213,481  
   


 


 

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

 

3


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

   

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
    2004

  2003

    2004

    2003

 

Revenue

  $ 574,999   $ 423,376     $ 1,566,907     $ 1,008,817  

Costs and expenses:

                             

Cost of services

    300,711     207,820       797,544       484,485  

Operating, administrative and other

    213,226     180,676       643,016       444,272  

Depreciation and amortization

    12,340     41,071       40,001       53,571  

Merger-related charges

    4,040     16,485       25,574       19,795  
   

 


 


 


Operating income (loss)

    44,682     (22,676 )     60,772       6,694  

Equity income from unconsolidated subsidiaries

    4,826     2,318       10,120       9,182  

Interest income

    672     1,373       2,303       2,624  

Interest expense

    14,919     21,000       52,138       51,739  

Loss on extinguishment of debt

    17,066     6,840       21,075       6,840  
   

 


 


 


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

    18,195     (46,825 )     (18 )     (40,079 )

Provision (benefit) for income taxes

    6,300     (18,380 )     1,690       (15,459 )
   

 


 


 


Net income (loss)

  $ 11,895   $ (28,445 )   $ (1,708 )   $ (24,620 )
   

 


 


 


Basic income (loss) per share

  $ 0.17   $ (0.49 )   $ (0.03 )   $ (0.52 )
   

 


 


 


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

    71,446,359     57,486,405       66,006,231       46,995,364  
   

 


 


 


Diluted income (loss) per share

  $ 0.16   $ (0.49 )   $ (0.03 )   $ (0.52 )
   

 


 


 


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

    75,184,418     57,486,405       66,006,231       46,995,364  
   

 


 


 


 

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

 

4


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

     Nine Months Ended
September 30,


 
     2004

    2003

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net loss

   $ (1,708 )   $ (24,620 )

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

                

Depreciation and amortization

     40,001       53,571  

Amortization and write-off of deferred financing costs

     10,094       10,176  

Amortization and write-off of long-term debt discount

     3,274       378  

Deferred compensation deferrals

     12,764       7,836  

Write-off of impaired investments

     2,990       —    

Gain on sale of servicing rights, property held for sale and other assets

     (5,789 )     (3,417 )

Equity income from unconsolidated subsidiaries

     (10,120 )     (9,182 )

Provision for doubtful accounts

     2,304       3,598  

Deferred income tax benefit

     (190 )     (13,600 )

Decrease in receivables

     37,465       23,253  

Increase in deferred compensation assets

     (3,072 )     (6,435 )

Decrease (increase) in prepaid expenses and other assets

     14,172       (14,237 )

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

     (41,843 )     (45,269 )

Decrease in accounts payable and accrued expenses

     (22,185 )     (22,089 )

Decrease in income tax payable

     (7,861 )     (29,134 )

Increase (decrease) in other liabilities

     6,946       (1,540 )

Other operating activities, net

     1,363       (3 )
    


 


Net cash provided by (used in) operating activities

     38,605       (70,714 )

CASH FLOWS FROM INVESTING ACTIVITIES:

                

Proceeds from sale of servicing rights and other assets

     5,607       1,922  

Proceeds from sale of property held for sale

     50,401       —    

Capital expenditures, net of concessions received

     (27,455 )     (8,185 )

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

     (16,784 )     (243,847 )

Other investing activities, net

     (2,948 )     (2,574 )
    


 


Net cash provided by (used in) investing activities

     8,821       (252,684 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                

Proceeds from revolver and swingline credit facility

     186,750       152,850  

Repayment of revolver and swingline credit facility

     (186,750 )     (152,850 )

Proceeds from senior secured term loan

     —         75,000  

Repayment of senior secured term loan

     (17,500 )     (7,513 )

Repayment of non-recourse debt related to property held for sale

     (42,048 )     —    

Repayment of notes payable

     —         (43,000 )

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

     (9,809 )     3,732  

Proceeds from 9 3/4% senior notes

     —         200,000  

Repayment of 9 3/4% senior notes

     (70,000 )     —    

Repayment of 11 1/4% senior subordinated notes

     (21,631 )     —    

Repayment of 16% senior notes

     (38,316 )     —    

Proceeds from issuance of common stock, net

     135,000       120,580  

Proceeds from exercise of stock options

     7,991       —    

Payment of deferred financing fees

     (3,942 )     (19,774 )

Other financing activities, net

     (1,466 )     (527 )
    


 


Net cash (used in) provided by financing activities

     (61,721 )     328,498  

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (14,295 )     5,100  

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

     163,881       79,701  

Effect of currency exchange rate changes on cash

     (1,661 )     693  
    


 


CASH AND CASH EQUIVALENTS, AT END OF PERIOD

   $ 147,925     $ 85,494  
    


 


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                

Cash paid during the period for:

                

Interest, net of amount capitalized

   $ 56,846     $ 31,694  
    


 


Income taxes, net of refunds

   $ 11,462     $ 25,533  
    


 


 

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

 

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Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.     Nature of Operations

 

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

 

CB Richard Ellis Group, Inc. was incorporated on February 20, 2001 and was created to acquire all of the outstanding shares of CB Richard Ellis Services, Inc. (CBRE), an international real estate services firm. Prior to July 20, 2001, we were a wholly owned subsidiary of Blum Strategic Partners, L.P., which is an affiliate of Richard C. Blum, a director of CBRE and our Company.

 

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

 

2.     Initial Public Offering

 

On June 15, 2004, we completed the initial public offering of shares of our Class A common stock (the IPO). In connection with the IPO, we issued and sold 7,726,764 shares of our Class A common stock and received aggregate net proceeds of approximately $135.0 million, after deducting underwriting discounts and commissions and offering expenses payable by us. Also in connection with the IPO, selling stockholders sold an aggregate of 16,273,236 shares of our Class A common stock and received net proceeds of approximately $290.6 million, after deducting underwriting discounts and commissions. On July 14, 2004, selling stockholders sold an additional 229,300 shares of our Class A common stock to cover over-allotments of shares by the underwriters and received net proceeds of approximately $4.1 million, after deducting underwriting discounts and commissions. We did not receive any of the proceeds from the sales of shares by the selling stockholders on June 15, 2004 and July 14, 2004.

 

3.    Insignia Acquisition

 

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

 

The aggregate purchase price for the acquisition of Insignia was approximately $329.5 million, which includes: (1) $267.9 million in cash paid for shares of Insignia’s outstanding common stock, at $11.156 per share, (2) $38.2 million in cash paid for Insignia’s outstanding Series A preferred stock and Series B preferred stock at $100.00 per share plus accrued and unpaid dividends, (3) cash payments of $7.9 million to holders of Insignia’s vested and unvested warrants and options and (4) $15.5 million of direct costs incurred in connection with the acquisition, consisting mostly of legal and accounting fees.

 

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Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Purchase accounting adjustments related to the Insignia Acquisition have been recorded in the accompanying consolidated financial statements as of, and for periods subsequent to, July 23, 2003. The final valuation of the net assets acquired was completed during the third quarter of 2004 and did not result in any significant adjustments when compared to the preliminary valuation, other than those noted below.

 

During the nine months ended September 30, 2004, we made the following significant adjustments to goodwill:

 

  In the first quarter of 2004, we assigned a $6.6 million estimated fair value to a broker draw asset acquired from Insignia. Based on our management’s estimates, we generally derive benefit from brokers participating in our draw program over two years. Accordingly, we estimate that we will derive benefit from the broker draw asset related to Insignia’s brokers over two years from the date of the Insignia Acquisition and, accordingly, we are amortizing it on a straight-line basis, which best reflects the pattern in which the economic benefits of the broker draw asset are consumed, during that period. The allocation of purchase price to the broker draw asset, net of related tax impact, resulted in a $3.8 million decrease in goodwill and a related $2.4 million increase in net loss during the nine months ended September 30, 2004, which includes a $0.8 million first quarter 2004 adjustment to correct the amortization taken for the period from the date of the Insignia Acquisition through December 31, 2003.

 

  During the nine months ended September 30, 2004, we recorded a $14.2 million increase to goodwill due to an increase in liabilities primarily related to additional lease termination costs, contract termination costs and costs associated with anticipated legal settlements. All such adjustments were recorded in accordance with the requirements of Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” As of the consummation date of the acquisition of Insignia, our management began to assess and formulate a plan to close certain Insignia locations. Due to the size of this acquisition and the dispersed nature of Insignia’s operations, a significant amount of time and effort was required to finalize plans with respect to closures, analyze the provisions of contracts to be terminated and estimate the total exit costs. The adjustment during the nine months ended September 30, 2004 represents a change in estimate as we completed our assessments and finalized our plans with respect to certain of the locations.

 

  In the first quarter of 2004, we recorded a $4.2 million increase to goodwill related to the sale of certain assets acquired in connection with the Insignia Acquisition. Of this amount, $3.7 million represented a receivable due from a buyer, which was collected in the second quarter of 2004. During the second and third quarter of 2004, we received additional cash for the sale of such assets as well as finalized the fair value assigned to such assets in the purchase price allocation. This resulted in a overall increase to goodwill of approximately $2.9 million, which reflects the sale of assets at an amount less than the value assigned in the preliminary purchase price allocation. As no event occurred during the period from the acquisition date to the sale date that would have impacted the value of these assets, our management concluded that the amount at which these assets were ultimately sold represents the best estimate of the fair value of these assets at the date of the Insignia Acquisition.

 

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

 

  During the nine months ended September 30, 2004, we recorded a reduction of $9.2 million to goodwill related to the deferred tax impact of all purchase accounting adjustments recorded in 2004, excluding the deferred tax impact previously mentioned related to the broker draw asset.

 

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Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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

 

    

2003

Charge To
Goodwill


   2004
Adjustments


   

Utilized

To Date


   

To be

Utilized


Severance

   $ 30,706    $ (19 )   $ (23,653 )   $ 7,034

Lease termination costs

     28,922      8,923       (10,152 )     27,693

Change of control payments

     10,451      —         (10,451 )     —  

Costs associated with exiting contracts

     8,921      1,519       (9,016 )     1,424

Legal settlements anticipated

     8,739      3,770       (3,122 )     9,387
    

  


 


 

     $ 87,739    $ 14,193     $ (56,394 )   $ 45,538
    

  


 


 

 

4.    Basis of Presentation

 

The consolidated statements of operations and cash flows for the three and nine months ended September 30, 2004 include full periods of activity for Insignia. However, the consolidated statements of operations and cash flows for the three and nine months ended September 30, 2003 include the activity of Insignia from July 23, 2003, the date of the Insignia Acquisition. As such, our consolidated financial statements after the Insignia Acquisition are not directly comparable to our consolidated financial statements prior to the Insignia Acquisition.

 

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

 

     September 30, 2003

 
     Three Months
Ended


    Nine Months
Ended


 

Revenue

   $ 462,004     $ 1,327,570  

Operating income (loss)

   $ 1,968     $ (25,238 )

Net loss

   $ (15,115 )   $ (52,326 )

Basic and diluted loss per share

   $ (0.24 )   $ (0.84 )

 

The accompanying consolidated financial statements have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management

 

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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ materially from those estimates. All significant inter-company transactions and balances have been eliminated, and certain reclassifications have been made to prior periods’ consolidated financial statements to conform with the current period presentation. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2004. The consolidated financial statements and notes to consolidated financial statements should be read in conjunction with our 2003 Annual Report on Form 10-K/A, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2003.

 

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

 

5.    Stock-Based Compensation

 

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

 

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

 

In accordance with SFAS No. 123, we estimate the fair value of our options using the Black-Scholes option-pricing model, which takes into account assumptions such as the dividend yield, the risk-free interest rate, the expected stock price volatility and the expected life of the options. As our Class A common stock was not freely tradeable on a national securities exchange or an over-the-counter market prior to the completion of the IPO, an effectively zero percent volatility was utilized for all periods ending prior to the IPO. The dividend yield is

 

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Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

excluded from the calculation, as it is our present intention to retain all earnings. The following table illustrates the effect on net income (loss) and income (loss) per share if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except share data):

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2004

    2003

    2004

    2003

 

Net income (loss) as reported

   $ 11,895     $ (28,445 )   $ (1,708 )   $ (24,620 )

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

     114       —         220       —    

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

     (310 )     (205 )     (697 )     (498 )
    


 


 


 


Pro forma net income (loss)

   $ 11,699     $ (28,650 )   $ (2,185 )   $ (25,118 )
    


 


 


 


Basic income (loss) per share:

                                

As reported

   $ 0.17     $ (0.49 )   $ (0.03 )   $ (0.52 )
    


 


 


 


Pro forma

   $ 0.16     $ (0.50 )   $ (0.03 )   $ (0.53 )
    


 


 


 


Diluted income (loss) per share:

                                

As reported

   $ 0.16     $ (0.49 )   $ (0.03 )   $ (0.52 )
    


 


 


 


Pro forma

   $ 0.16     $ (0.50 )   $ (0.03 )   $ (0.53 )
    


 


 


 


 

The weighted average fair value of options granted by us was $8.07 and $0.53 for the three months ended September 30, 2004 and 2003, respectively, and $8.05 and $0.58 for the nine months ended September 30, 2004 and 2003, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, utilizing the following weighted average assumptions:

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2004

    2003

    2004

    2003

 

Risk-free interest rate

   3.20 %   2.74 %   3.20 %   3.03 %

Expected volatility

   40.00 %   0.00 %   30.00 %   0.00 %

Expected life

   4 years     5 years     4 years     5 years  

 

Option valuation models require the input of subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, we do not believe that the Black-Scholes model necessarily provides a reliable single measure of the fair value of our employee stock options.

 

6.    Fair Value of Financial Instruments

 

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Value is defined as the amount at which an instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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

 

Receivables: Due to their short-term nature, fair value approximates carrying value.

 

Warehouse Receivable: Due to their short-term nature, fair value approximates carrying value. Fair value is determined based on the terms and conditions of the funded mortgage loans and generally reflects the value of the Residential Funding Corporation (RFC) warehouse line of credit outstanding (see Note 11).

 

Short-Term Borrowings: The majority of this balance represents the warehouse line of credit. Due to their short-term maturities and variable interest rates, fair value approximates carrying value (See Note 11).

 

11 1/4% Senior Subordinated Notes: Based on dealers’ quotes, the estimated fair value of the 11 1/4% senior subordinated notes is $238.5 million and $256.5 million at September 30, 2004 and December 31, 2003, respectively. Their actual carrying value totaled $205.0 million and $226.2 million at September 30, 2004 and December 31, 2003, respectively (See Note 11).

 

9 3/4% Senior Notes: Based on dealers’ quotes, the estimated fair value of the 9 3/4% senior notes is $148.2 million and $222.0 million at September 30, 2004 and December 31, 2003, respectively. Their actual carrying value totaled $130.0 million and $200.0 million at September 30, 2004 and December 31, 2003, respectively. (See Note 11).

 

Senior Secured Terms Loans & Other Long-Term Debt: Estimated fair values approximate respective carrying values because a substantial majority of these instruments are based on variable interest rates (see Note 11).

 

7.    Restricted Cash

 

Included in the accompanying consolidated balance sheets as of September 30, 2004 and December 31, 2003, is restricted cash of $10.6 million and $14.9 million, respectively, which primarily consists of cash pledged to secure the guarantee of certain short-term notes issued in connection with previous acquisitions by Insignia in the United Kingdom (U.K.). The acquisitions include the 1999 acquisition of St. Quintin Holdings Limited and the 1998 acquisition of Richard Ellis Group Limited.

 

8.    Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for us and each of our segments (See Note 19 for a description of our segments) for the nine months ended September 30, 2004 are as follows (dollars in thousands):

 

     Americas

   EMEA

   Asia Pacific

   Total

Balance at January 1, 2004

   $ 598,439    $ 217,106    $ 4,013    $ 819,558

Purchase accounting adjustments related to acquisitions

     6,177      1,124      3,864      11,165
    

  

  

  

Balance at September 30, 2004

   $ 604,616    $ 218,230    $ 7,877    $ 830,723
    

  

  

  

 

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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Other intangible assets totaled $117.3 million and $131.7 million, net of accumulated amortization of $89.1million and $73.4 million, as of September 30, 2004 and December 31, 2003, respectively, and are comprised of the following (dollars in thousands):

 

     As of September 30, 2004

    As of December 31, 2003

 
     Gross
Carrying
Amount


   Accumulated
Amortization


    Gross
Carrying
Amount


   Accumulated
Amortization


 

Unamortizable intangible assets

                              

Trademarks

   $ 63,700            $ 63,700         

Trade name

     19,826              19,826         
    

          

        
     $ 83,526            $ 83,526         
    

          

        

Amortizable intangible assets

                              

Backlog

   $ 72,149    $ (69,355 )   $ 72,503    $ (59,108 )

Management contracts

     25,731      (12,287 )     25,649      (9,708 )

Loan servicing rights

     19,194      (5,254 )     17,694      (3,812 )

Other

     5,808      (2,217 )     5,808      (821 )
    

  


 

  


     $ 122,882    $ (89,113 )   $ 121,654    $ (73,449 )
    

  


 

  


Total intangible assets

   $ 206,408    $ (89,113 )   $ 205,180    $ (73,449 )
    

  


 

  


 

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

 

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

 

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

 

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

 

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

 

Amortization expense related to intangible assets was $4.3 million and $32.5 million for the three months ended September 30, 2004 and 2003, respectively, and $15.6 million and $34.4 million for the nine months

 

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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

ended September 30, 2004 and 2003, respectively. The estimated annual amortization expense for each of the years ended December 31, 2004 through December 31, 2008 approximates $20.7 million, $6.7 million, $5.3 million, $4.5 million and $3.8 million, respectively.

 

9.    Investments in and Advances to Unconsolidated Subsidiaries

 

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

 

Condensed Balance Sheets Information:

 

     September 30,
2004


   December 31,
2003


Current assets

   $ 211,151    $ 208,743

Non current assets

   $ 2,845,552    $ 2,040,138

Current liabilities

   $ 284,151    $ 154,778

Non current liabilities

   $ 1,309,935    $ 969,993

Minority interest

   $ 6,783    $ 4,600

 

Condensed Statements of Operations Information:

 

     Three Months Ended
September 30,


   Nine Months Ended
September 30,


     2004

   2003

   2004

   2003

Net revenue

   $ 168,126    $ 116,516    $ 404,460    $ 319,328

Operating income

   $ 37,601    $ 31,296    $ 93,136    $ 87,046

Net income

   $ 51,039    $ 31,135    $ 125,138    $ 78,922

 

Our investment management business involves investing our own capital in certain real estate investments with clients. We have provided investment management, property management, brokerage and other professional services to these equity investees on an arm’s length basis and earned revenues from these unconsolidated subsidiaries of $4.8 million and $6.8 million for the three months ended September 30, 2004 and 2003, respectively, and $16.8 million and $17.3 million for the nine months ended September 30, 2004 and 2003, respectively.

 

10.    Employee Benefit Plans

 

On September 22, 2004, pursuant to our 2004 Stock Incentive Plan, certain employees were granted 1,245,000 options to acquire Class A common stock at an exercise price of $22.39 per share. These options vest and are exercisable in 25% increments over a four-year period and expire on September 22, 2009.

 

11.    Debt

 

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

 

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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Our Credit Agreement permitted us, among other things, to use the net proceeds received from our IPO to pay down debt, including the redemptions in July 2004 of all $38.3 million in aggregate principal amount of our 16% senior notes due 2011 and $70.0 million in aggregate principal amount of our 9 3/4% senior notes due 2010, and the prepayment of $15.0 million in principal amount of our term loan under our Credit Agreement, which prepayment occurred on June 15, 2004.

 

Our Credit Agreement includes the following: (1) a term loan facility of $295.0 million (of which $280.0 million was outstanding as of September 30, 2004), requiring quarterly principal payments of $2.95 million beginning December 31, 2004 through December 31, 2009 with the balance payable on March 31, 2010; and (2) a $150.0 million revolving credit facility, including revolving credit loans, letters of credit and a swingline loan facility, all maturing on March 31, 2009. Our Credit Agreement also permits us to make additional borrowings under the term loan facility of up to $25.0 million, subject to the satisfaction of customary conditions.

 

Borrowings under the term loan facility bear interest at varying rates based, at our option, on either LIBOR plus 2.25% to 2.50% or the alternate base rate plus 1.25% to 1.50%, in both cases as determined by reference to the credit rating assigned to the term facility by Moody’s Investors Service and Standard & Poor’s. The alternate base rate is the higher of (1) CSFB’s prime rate or (2) the Federal Funds Effective Rate plus one-half of one percent. The potential increase of up to $25.0 million for the term loan facility would bear interest either at the same rate as the current rate for the term loan facility or, in some circumstances as described in the Credit Agreement, at a higher or lower rate. During June 2004, we used a portion of the net proceeds we received from the IPO to prepay $15.0 million in principal amount of the term loan facility. The total amount outstanding under the term loan facility included in the senior secured term loan and current maturities of long-term debt in the accompanying consolidated balance sheets was $280.0 million and $297.5 million as of September 30, 2004 and December 31, 2003, respectively.

 

Borrowings under the revolving credit facility bear interest at varying rates based at our option, on either the applicable LIBOR plus 2.00% to 2.50% or the alternate base rate plus 1.00% to 1.50%, in both cases as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement). As of September 30, 2004 and December 31, 2003 we had no revolving credit facility principal outstanding. As of September 30, 2004, letters of credit totaling $24.3 million were outstanding, which letters of credit primarily relate to our subsidiaries’ outstanding indebtedness and operating leases and reduce the amount we may borrow under the revolving credit facility.

 

Borrowings under the Credit Agreement are jointly and severally guaranteed by us and substantially all of our domestic subsidiaries and are secured by a pledge of substantially all of our assets. Additionally, the Credit Agreement requires us to pay a fee based on the total amount of the unused revolving credit facility commitment.

 

In May 2003, in connection with the Insignia Acquisition, CBRE Escrow, Inc. (CBRE Escrow), a wholly owned subsidiary of CBRE, issued $200.0 million in aggregate principal amount of 9 3/4% senior notes, which are due May 15, 2010. CBRE Escrow merged with and into CBRE, and CBRE assumed all obligations with respect to the 9 3/4% senior notes in connection with the Insignia Acquisition. The 9 3/4% senior notes are unsecured obligations of CBRE, senior to all of its current and future unsecured indebtedness, but subordinated to all of CBRE’s current and future secured indebtedness. The 9 3/4% senior notes are jointly and severally guaranteed on a senior basis by us and substantially all of our domestic subsidiaries. Interest accrues at a rate of 9 3/4% per year and is payable semi-annually in arrears on May 15 and November 15. The 9 3/4% senior notes are redeemable at our option, in whole or in part, on or after May 15, 2007 at 104.875% of par on that date and at declining prices thereafter. In addition, before May 15, 2006, we were permitted to redeem up to 35.0% of the originally issued amount of the 9 3/4% senior notes at 109 3/4% 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

 

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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

9 3/4% senior notes, which also required the payment of a $6.8 million premium and accrued and unpaid interest through the date of redemption. Additionally, we wrote off $3.1 million of unamortized deferred financing costs in connection with this redemption. In the event of a change of control (as defined in the indenture governing our 9 3/4% senior notes), we are obligated to make an offer to purchase the 9 3/4% senior notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest. The amount of the 9 3/4% senior notes included in the accompanying consolidated balance sheets was $130.0 million and $200.0 million as of September 30, 2004 and December 31, 2003, respectively.

 

In June 2001, in connection with the 2001 Merger, Blum CB issued $229.0 million in aggregate principal amount of 11 1/4% senior subordinated notes due June 15, 2011 for approximately $225.6 million, net of discount. CBRE assumed all obligations with respect to the 11 1/4% senior subordinated notes in connection with the 2001 Merger. The 11 1/4% senior subordinated notes are unsecured senior subordinated obligations of CBRE and rank equally in right of payment with any of CBRE’s existing and future unsecured senior subordinated indebtedness but are subordinated to any of CBRE’s existing and future senior indebtedness. The 11 1/4% senior subordinated notes are jointly and severally guaranteed on a senior subordinated basis by us and substantially all of our domestic subsidiaries. The 11 1/4% senior subordinated notes require semi-annual payments of interest in arrears on June 15 and December 15 and are redeemable in whole or in part on or after June 15, 2006 at 105.625% of par on that date and at declining prices thereafter. In addition, before June 15, 2004, we were permitted to redeem up to 35.0% of the originally issued amount of the notes at 111 1/4% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings, which we did not do. In the event of a change of control (as defined in the indenture governing our 11 1/4% senior subordinated notes), we are obligated to make an offer to purchase the 11 1/4% senior subordinated notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest. In May and June 2004, we repurchased $21.6 million in aggregate principal amount of our 11 1/4% senior subordinated notes in the open market. We paid an aggregate of $3.1 million of premiums and wrote off $0.9 million of unamortized deferred financing costs and unamortized discount in connection with these open market purchases. The amount of the 11 1/4% senior subordinated notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $205.0 million and $226.2 million as of September 30, 2004 and December 31, 2003, respectively.

 

Also, to partially fund the acquisition of CBRE in 2001, we issued $65.0 million in aggregate principal amount of 16% senior notes due July 20, 2011. The 16% senior notes were unsecured obligations, senior to all of our current and future unsecured indebtedness but subordinated to all of our current and future secured indebtedness. Interest accrued at a rate of 16.0% per year and was payable quarterly in arrears. Under the terms of the indenture governing the 16% senior notes and subject to the restrictions set forth in the Credit Agreement, the notes were redeemable at our option, in whole or in part, at 116.0% of par commencing on July 20, 2001 and at declining prices thereafter. During July 2004, we used a portion of the net proceeds we received from our IPO to redeem the remaining $38.3 million in aggregate principal amount of our 16% senior notes, which also required the payment of a $2.5 million premium and accrued and unpaid interest through the date of redemption. Additionally, we wrote off $4.8 million of unamortized deferred financing costs and unamortized discount in connection with this redemption. The amount of the 16% senior notes included in the accompanying consolidated balance sheet, net of unamortized discount was $35.5 million as of December 31, 2003.

 

Our Credit Agreement and the indentures governing our 9 3/4% senior notes and our 11 1/4% senior subordinated notes each contain numerous restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or make distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, engage in transactions with affiliates, enter into sale/leaseback transactions, issue subsidiary equity and enter into consolidations or mergers. Our Credit Agreement also currently requires us to maintain a minimum coverage ratio of interest and certain fixed charges and a maximum leverage and senior secured leverage ratio of EBITDA (as defined in the Credit Agreement) to funded debt.

 

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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

A joint venture that we have consolidated since 2001 incurred non-recourse debt to acquire a real estate investment in Japan in 2001. This debt was secured by a mortgage on the acquired real estate asset. During August 2004, the joint venture completed the sale of this real estate asset and utilized the proceeds from the sale to repay all of the related non-recourse debt, plus accrued interest and other fees. In our accompanying consolidated balance sheet, this debt comprised $2.0 million of our other short-term borrowings and $41.8 million of our other long-term debt as of December 31, 2003.

 

We had short-term borrowings of $138.2 million and $270.1 million with weighted average interest rates of 3.4% and 2.7% as of September 30, 2004 and December 31, 2003, respectively.

 

Our wholly owned subsidiary, L.J. Melody & Company (L.J. Melody), has a credit agreement with RFC for the purpose of funding mortgage loans that will be resold. On August 19, 2004, we entered into a Third Amendment to the Fourth Amended and Restated Warehousing Credit and Security Agreement (warehouse line of credit). The current agreement provides for a warehouse line of credit of up to $250.0 million, bears interest at one-month LIBOR plus 1.0% and expires on December 1, 2004. During the quarter ended September 30, 2004, we had a maximum of $244.6 million warehouse line of credit principal outstanding with RFC. As of September 30, 2004 and December 31, 2003, we had a $111.8 million and a $230.8 million warehouse line of credit outstanding, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets. Additionally, we had $111.8 million and $230.8 million of mortgage loans held for sale (warehouse receivable), which represented mortgage loans funded through the line of credit that, while committed to be purchased, had not yet been purchased, as of September 30, 2004 and December 31, 2003, respectively, which are also included in the accompanying consolidated balance sheets.

 

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

 

Insignia, which we acquired in July 2003, issued loan notes as partial consideration for previous acquisitions of businesses in the U.K. The acquisition loan notes are payable to the sellers of the previously acquired U.K. businesses and are secured by restricted cash deposits in approximately the same amount. The acquisition loan notes are redeemable semi-annually at the discretion of the note holder and have a final maturity date of April 2010. As of September 30, 2004 and December 31, 2003, $9.7 million and $12.2 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%. The amount of the Euro cash pool loan included in short-term borrowings in the accompanying consolidated balance sheets was $3.5 million and $11.5 million as of September 30, 2004 and December 31, 2003, respectively.

 

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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12.    Commitments and Contingencies

 

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

 

In connection with the sale of real estate investment assets by Insignia to Island Fund I LLC (Island) on July 23, 2003, Insignia agreed to maintain letter of credit support for real estate investment assets that were subject to the purchase agreement until the earlier of (1) the third anniversary of the completion of the sale, (2) the date on which the letter of credit is no longer required pursuant to the applicable real estate investment asset agreement or (3) the completion of a sale of the relevant underlying real estate investment asset. As of September 30, 2004, an aggregate of approximately $5.2 million of this letter of credit support remained outstanding under the purchase agreement. Also in connection with the sale, Insignia agreed to maintain a $1.3 million guarantee of a repayment obligation with respect to one of the real estate investment assets. Island agreed to reimburse us for 50% of any draws against these letters of credit or the repayment guarantee while they are outstanding and delivered a letter of credit to us in the amount of approximately $2.9 million as security for Island’s reimbursement obligation. As a result of this reimbursement obligation, we effectively retain potential liability for 50% of any future draws against these letters of credit and the repayment guarantee. However, there can be no assurance that Island will be able to reimburse us in the event of any draws against the letters of credit or the repayment guarantee or that Island’s future reimbursement obligations will not exceed the amount of the letter of credit provided to us by Island.

 

L.J. Melody previously executed an agreement with the Federal National Mortgage Association (Fannie Mae) to initially fund the purchase of a commercial mortgage loan portfolio using proceeds from its RFC line of credit. Subsequently, a 100% participation in the loan portfolio was sold to Fannie Mae and L.J. Melody retains the credit risk on the first 2% of losses incurred on the underlying portfolio of commercial mortgage loans. The current loan portfolio balance is $85.8 million and we have collateralized a portion of our obligations to cover the first 1% of losses through a letter of credit in favor of Fannie Mae for a total of approximately $0.9 million. The other 1% is covered in the form of a guarantee to Fannie Mae by L.J. Melody.

 

We had letters of credit totaling $6.1 million as of September 30, 2004, excluding letters of credit related to our subsidiaries’ outstanding indebtedness and operating leases. Approximately $5.2 million of these letters of credit were issued pursuant to the terms of the purchase agreement with Island described above. The remaining $0.9 million outstanding letter of credit is the Fannie Mae letter of credit described above. The outstanding letters of credit as of September 30, 2004 expire at varying dates through July 23, 2005. However, we are obligated to renew the letters of credit related to certain office leases until as late as 2023, the letters of credit related to the Island purchase agreement until as late as July 23, 2006 and the Fannie Mae letter of credit until our obligation to cover potential credit losses is satisfied.

 

We had guarantees totaling $5.1 million as of September 30, 2004, which consisted primarily of guarantees of property debt as well as the obligations to Island and Fannie Mae discussed above. Approximately $1.2 million of the guarantees are related to investment activity that is scheduled to expire on September 1, 2008. The guarantee related to the Island purchase agreement expired on the September 15, 2004 maturity date of the underlying loan agreement, however, similar loan terms are expected to be renewed, modified or extended upon the completion of on-going negotiations. Currently, renewals, modifications and extensions of such loan may be made without our consent, but the Insignia $1.3 million amount of our guarantee related to such loan may not be increased without our consent in connection with any such renewal, modification or extension. The guarantee obligation related to the agreement with Fannie Mae discussed above will expire in December 2004.

 

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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

An important part of the strategy for our investment management business involves investing our capital in certain real estate investments with our clients. As of September 30, 2004 we had committed $41.7 million to fund future co-investments. In addition to required future capital contributions, some of the co-investment entities may request additional capital from us and our subsidiaries holding investments in those assets and the failure to provide these contributions could have adverse consequences to our interests in these investments.

 

13.    Comprehensive Income (Loss)

 

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

 

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

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2004

   2003

    2004

    2003

 

Net income (loss)

   $ 11,895    $ (28,445 )   $ (1,708 )   $ (24,620 )

Foreign currency translation gain (loss)

     156      4,548       (2,645 )     1,274  
    

  


 


 


Comprehensive income (loss)

   $ 12,051    $ (23,897 )   $ (4,353 )   $ (23,346 )
    

  


 


 


 

14.    Earnings (Loss) Per Share Information

 

Earnings (loss) per share (EPS) is accounted for in accordance with SFAS No. 128, “Earnings Per Share.” Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding during each period. Where appropriate, the computation of diluted EPS further assumes the dilutive effect of potential common shares, which include stock options, stock warrants and certain contingently issuable shares. Contingently issuable shares represent unvested stock fund units in the deferred compensation plan. The following is a calculation of the earnings (loss) per share (dollars in thousands, except share data):

 

    Three Months Ended September 30,

 
    2004

  2003

 
    Income

  Shares

  Per Share
Amount


  Loss

    Shares

  Per Share
Amount


 

Basic earnings (loss) per share:

                                   

Net income (loss) applicable to common stockholders

  $ 11,895   71,446,359   $ 0.17   $ (28,445 )   57,486,405   $ (0.49 )
   

 
 

 


 
 


Diluted earnings (loss) per share:

                                   

Net income (loss) applicable to common stockholders

  $ 11,895   71,446,359         $ (28,445 )   57,486,405        

Dilutive effect of contingently issuable shares

    —     1,184,170           —       —          

Dilutive effect of incremental stock options

    —     2,553,889           —       —          
   

 
       


 
       

Net income (loss) applicable to common stockholders

  $ 11,895   75,184,418   $ 0.16   $ (28,445 )   57,486,405   $ (0.49 )
   

 
 

 


 
 


 

18


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

    Nine Months Ended September 30,

 
    2004

    2003

 
    Loss

    Shares

  Per Share
Amount


    Loss

    Shares

  Per Share
Amount


 

Basic and diluted loss per share:

                                       

Net loss applicable to common stockholders

  $ (1,708 )   66,006,231   $ (0.03 )   $ (24,620 )   46,995,364   $ (0.52 )
   


 
 


 


 
 


 

Options to purchase 1,245,000 shares of Class A common stock granted during the three months ended September 30, 2004 were not included in the computation of diluted EPS for the three months ended September 30, 2004 as the options’ exercise price was greater than the average market price of the Class A common shares during the period.

 

As a result of operating losses incurred for the three months ended September 30, 2003 and the nine months ended September 30, 2004 and 2003, dilutive weighted average shares outstanding did not give effect to potential common shares, as to do so would have been anti-dilutive.

 

15.    Fiduciary Funds

 

The accompanying consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which amounted to $661.7 million and $626.3 million at September 30, 2004 and December 31, 2003, respectively.

 

16.    Pensions

 

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

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2004

    2003

    2004

    2003

 

Service cost

   $ 1,808     $ 1,672     $ 4,938     $ 4,510  

Interest cost

     2,791       2,230       8,409       5,014  

Expected return on plan assets

     (3,170 )     (2,246 )     (9,477 )     (5,421 )

Amortization of prior service costs

     (85 )     —         (191 )     —    

Amortization of unrecognized net gain

     274       504       1,109       1,498  
    


 


 


 


Net periodic pension cost

   $ 1,618     $ 2,160     $ 4,788     $ 5,601  
    


 


 


 


 

We contributed an additional $1.5 million and $3.8 million to fund our pension plans during the three and nine months ended September 30, 2004. We expect to contribute a total of $4.9 million to fund our pension plans for the year ended December 31, 2004.

 

17.    Merger-Related Charges

 

We recorded merger-related charges of $4.0 million and $25.6 million for the three and nine months ended September 30, 2004, respectively, and $16.5 million and $19.8 million for the three and nine months ended September 30, 2003, all in connection with the Insignia Acquisition. These charges primarily related to the exit of facilities that were occupied by us prior to the Insignia Acquisition as well as the termination of employees,

 

19


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

both of which became duplicative as a result of the Insignia Acquisition. We recorded charges for the exit of these facilities as premises were vacated and for redundant employees as these employees were terminated, both in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Additionally, we recorded consulting costs, which represented fees paid to outside parties for nonrecurring services relating to the combination of Insignia’s financial systems and businesses with ours. Our merger-related charges consisted of the following (dollars in thousands):

 

    

2003

Charges


  

2004

Charges


   Utilized
To Date


    To be
Utilized


Lease termination costs

   $ 15,805    $ 19,643    $ (6,625 )   $ 28,823

Severance

     7,042      2,215      (9,257 )     —  

Change of control payments

     6,525      —        (6,525 )     —  

Consulting costs

     2,738      1,888      (4,626 )     —  

Other

     4,707      1,828      (6,535 )     —  
    

  

  


 

Total merger-related charges

   $ 36,817    $ 25,574    $ (33,568 )   $ 28,823
    

  

  


 

 

18.    Guarantor and Nonguarantor Financial Statements

 

The 9 3/4% senior notes are jointly and severally guaranteed on a senior basis by us and substantially all of our domestic subsidiaries. In addition, the 11 1/4% senior subordinated notes are jointly and severally guaranteed on a senior subordinated basis by us and substantially all of our domestic subsidiaries (See Note 11 to the consolidated financial statements for additional information on the 9 3/4% senior notes and the 11 1/4% senior subordinated notes).

 

The following condensed consolidating financial information includes:

 

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

 

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

 

Investments in consolidated subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in consolidated subsidiaries and inter-company balances and transactions. The purchase accounting adjustments associated with the Insignia Acquisition have been recorded in the accompanying consolidated financial statements. The condensed consolidated balance sheet as of September 30, 2004 reflects the allocation of goodwill based upon the final valuation of the net assets acquired, which valuation was completed during the third quarter of 2004. As a result, the condensed consolidated balance sheet as of December 31, 2003, reflects the allocation of goodwill based upon the estimated fair value of Insignia’s acquired reporting units as of that date (See Note 3 to the consolidated financial statements for additional information).

 

20


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2004

(Dollars in thousands)

 

    Parent

  CBRE

  Guarantor
Subsidiaries


  Nonguarantor
Subsidiaries


  Elimination

    Consolidated
Total


Current Assets:

                                     

Cash and cash equivalents

  $ 54   $ 2,315   $ 126,066   $ 19,490   $ —       $ 147,925

Restricted cash

    —       —       10,162     452     —         10,614

Receivables, less allowance for doubtful accounts

    20     6     115,451     160,866     —         276,343

Warehouse receivable (a)

    —       —       111,840     —       —         111,840

Prepaid expenses and other current assets

    84,273     804     21,064     22,538     —         128,679
   

 

 

 

 


 

Total Current Assets

    84,347     3,125     384,583     203,346     —         675,401

Property and equipment, net

    —       —       81,512     46,564     —         128,076

Goodwill

    —       —       578,539     252,184     —         830,723

Other intangible assets, net

    —       —       91,779     25,516     —         117,295

Deferred compensation assets

    —       79,461     —       —       —         79,461

Investments in and advances to unconsolidated subsidiaries

    —       5,551     62,068     15,918     —         83,537

Investments in consolidated subsidiaries

    306,782     154,734     146,379     —       (607,895 )     —  

Inter-company loan receivable

    69,953     813,720     —       —       (883,673 )     —  

Deferred tax assets, net

    30,636     —       —       —       —         30,636

Other assets, net

    —       26,841     29,095     6,282     —         62,218
   

 

 

 

 


 

Total Assets

  $ 491,718   $ 1,083,432   $ 1,373,955   $ 549,810   $ (1,491,568 )   $ 2,007,347
   

 

 

 

 


 

Current Liabilities:

                                     

Accounts payable and accrued expenses

  $ —     $ 14,969   $ 77,180   $ 77,981   $ —       $ 170,130

Compensation and employee benefits payable

    —       —       102,464     53,769     —         156,233

Accrued bonus and profit sharing

    —       —       86,508     57,077     —         143,585

Short-term borrowings:

                                     

Warehouse line of credit (a)

    —       —       111,840     —       —         111,840

Other

    —       —       22,754     3,642     —         26,396
   

 

 

 

 


 

Total short-term borrowings

    —       —       134,594     3,642     —         138,236

Current maturities of long-term debt

    —       11,800     1,028     193     —         13,021

Other current liabilities

    13,470     —       —       —       —         13,470
   

 

 

 

 


 

Total Current Liabilities

    13,470     26,769     401,774     192,662     —         634,675

Long-Term Debt:

                                     

11 1/4% senior subordinated notes, net of unamortized discount

    —       204,972     —       —       —         204,972

Senior secured term loan

    —       268,200     —       —       —         268,200

9 3/4% senior notes

    —       130,000     —       —       —         130,000

Inter-company loan payable

    —       —       748,699     134,974     (883,673 )     —  

Other long-term debt

    —       —       330     547     —         877
   

 

 

 

 


 

Total Long-Term Debt

    —       603,172     749,029     135,521     (883,673 )     604,049

Deferred compensation liability

    —       146,709     —       —       —         146,709

Other liabilities

    —       —       68,418     68,581     —         136,999
   

 

 

 

 


 

Total Liabilities

    13,470     776,650     1,219,221     396,764     (883,673 )     1,522,432

Minority interest

    —       —       —       6,667     —         6,667

Commitments and contingencies

                                     

Stockholders’ Equity

    478,248     306,782     154,734     146,379     (607,895 )     478,248
   

 

 

 

 


 

Total Liabilities and Stockholders’ Equity

  $ 491,718   $ 1,083,432   $ 1,373,955   $ 549,810   $ (1,491,568 )   $ 2,007,347
   

 

 

 

 


 


(a) Although L.J. Melody is included among our domestic subsidiaries, which jointly and severally guarantee our 9 3/4% senior notes and 11 1/4% senior subordinated notes, all warehouse receivables funded under the RFC line of credit are pledged to RFC, and accordingly are not included as collateral for these notes or our other outstanding debt.

 

21


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2003

(Dollars in thousands)

 

    Parent

  CBRE

  Guarantor
Subsidiaries


  Nonguarantor
Subsidiaries


  Elimination

    Consolidated
Total


Current Assets:

                                     

Cash and cash equivalents

  $ 3,008   $ 17   $ 148,752   $ 12,104   $ —       $ 163,881

Restricted cash

    —       —       12,545     2,354     —         14,899

Receivables, less allowance for doubtful accounts

    27     18     114,215     208,156     —         322,416

Warehouse receivable (a)

    —       —       230,790     —       —         230,790

Prepaid expenses and other current assets

    63,557     42,151     18,957     22,998     (40,667 )     106,996
   

 

 

 

 


 

Total Current Assets

    66,592     42,186     525,259     245,612     (40,667 )     838,982

Property and equipment, net

    —       —       66,280     47,289     —         113,569

Goodwill

    —       —       572,376     247,182     —         819,558

Other intangible assets, net

    —       —       101,326     30,405     —         131,731

Deferred compensation assets

    —       76,389     —       —       —         76,389

Investments in and advances to unconsolidated subsidiaries

    —       4,973     50,732     12,656     —         68,361

Investments in consolidated subsidiaries

    321,451     252,399     199,393     —       (773,243 )     —  

Inter-company loan receivable

    —       787,009     —       —       (787,009 )     —  

Deferred tax assets, net

    32,179     —       —       —       —         32,179

Other assets, net

    2,555     27,819     44,779     57,559     —         132,712
   

 

 

 

 


 

Total Assets

  $ 422,777   $ 1,190,775   $ 1,560,145   $ 640,703   $ (1,600,919 )   $ 2,213,481
   

 

 

 

 


 

Current Liabilities:

                                     

Accounts payable and accrued expenses

  $ 1,187   $ 7,614   $ 64,392   $ 116,594   $ —       $ 189,787

Inter-company payable

    40,667     —       —       —       (40,667 )     —  

Compensation and employee benefits payable

    —       —       98,160     50,714     —         148,874

Accrued bonus and profit sharing

    —       —       112,365     87,978     —         200,343

Short-term borrowings:

                                     

Warehouse line of credit (a)

    —       —       230,790     —       —         230,790

Other

    —       —       25,480     13,867     —         39,347
   

 

 

 

 


 

Total short-term borrowings

    —       —       256,270     13,867     —         270,137

Current maturities of long-term debt

    —       10,000     1,029     256     —         11,285

Other current liabilities

    12,522     —       —       469     —         12,991
   

 

 

 

 


 

Total Current Liabilities

    54,376     17,614     532,216     269,878     (40,667 )     833,417

Long-Term Debt:

                                     

11 1/4% senior subordinated notes, net of unamortized discount

    —       226,173     —       —       —         226,173

Senior secured term loan

    —       287,500     —       —       —         287,500

9 3/4% senior notes

    —       200,000     —       —       —         200,000

16% senior notes, net of unamortized discount

    35,472     —       —       —       —         35,472

Inter-company loan payable

    —       —       726,844     60,165     (787,009 )     —  

Other long-term debt

    —       —       330     41,945     —         42,275
   

 

 

 

 


 

Total Long-Term Debt

    35,472     713,673     727,174     102,110     (787,009 )     791,420

Deferred compensation liability

    —       138,037     —       —       —         138,037

Other liabilities

    —       —       48,356     62,666     —         111,022
   

 

 

 

 


 

Total Liabilities

    89,848     869,324     1,307,746     434,654     (827,676 )     1,873,896

Minority interest

    —       —       —       6,656     —         6,656

Commitments and contingencies

                                     

Stockholders’ Equity

    332,929     321,451     252,399     199,393     (773,243 )     332,929
   

 

 

 

 


 

Total Liabilities and Stockholders’ Equity

  $ 422,777   $ 1,190,775   $ 1,560,145   $ 640,703   $ (1,600,919 )   $ 2,213,481
   

 

 

 

 


 


(a) Although L.J. Melody is included among our domestic subsidiaries, which jointly and severally guarantee our 9 3/4% senior notes and 11 1/4% senior subordinated notes, all warehouse receivables funded under the RFC line of credit are pledged to RFC, and accordingly are not included as collateral for these notes or our other outstanding debt.

 

22


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004

(Dollars in thousands)

 

     Parent

    CBRE

    Guarantor
Subsidiaries


   Nonguarantor
Subsidiaries


   Elimination

    Consolidated
Total


Revenue

   $ —       $ —       $ 406,679    $ 168,320    $ —       $ 574,999

Costs and expenses:

                                            

Cost of services

     —         —         222,991      77,720      —         300,711

Operating, administrative and other

     529       2,842       132,714      77,141      —         213,226

Depreciation and amortization

     —         —         8,683      3,657      —         12,340

Merger-related charges

     —         —         3,761      279      —         4,040
    


 


 

  

  


 

Operating (loss) income

     (529 )     (2,842 )     38,530      9,523      —         44,682

Equity income from unconsolidated subsidiaries

     —         294       4,368      164      —         4,826

Interest income

     20       8,403       470      177      (8,398 )     672

Interest expense

     368       13,540       7,320      2,089      (8,398 )     14,919

Loss on extinguishment of debt

     7,166       9,900       —        —        —         17,066

Equity income from consolidated subsidiaries

     17,209       28,770       4,752      —        (50,731 )     —  
    


 


 

  

  


 

Income before (benefit) provision for income taxes

     9,166       11,185       40,800      7,775      (50,731 )     18,195

(Benefit) provision for income taxes

     (2,729 )     (6,024 )     12,030      3,023      —         6,300
    


 


 

  

  


 

Net income

   $ 11,895     $ 17,209     $ 28,770    $ 4,752    $ (50,731 )   $ 11,895
    


 


 

  

  


 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003

(Dollars in thousands)

 

     Parent

    CBRE

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


    Elimination

    Consolidated
Total


 

Revenue

   $ —       $ —       $ 309,075     $ 114,301     $ —       $ 423,376  

Costs and expenses:

                                                

Cost of services

     —         —         156,972       50,848       —         207,820  

Operating, administrative and other

     88       (1,994 )     125,412       57,170       —         180,676  

Depreciation and amortization

     —         —         38,162       2,909       —         41,071  

Merger-related charges

     —         —         14,151       2,334       —         16,485  
    


 


 


 


 


 


Operating (loss) income

     (88 )     1,994       (25,622 )     1,040       —         (22,676 )

Equity income (loss) from unconsolidated subsidiaries

     —         60       2,539       (281 )     —         2,318  

Interest income

     67       10,596       832       56       (10,178 )     1,373  

Interest expense

     2,947       18,826       8,389       1,016       (10,178 )     21,000  

Loss on extinguishment of debt

     —         6,840       —         —         —         6,840  

Equity (loss) income from consolidated subsidiaries

     (26,924 )     (20,315 )     1,813       —         45,426       —    
    


 


 


 


 


 


Loss before benefit for income taxes

     (29,892 )     (33,331 )     (28,827 )     (201 )     45,426       (46,825 )

Benefit for income taxes

     (1,447 )     (6,407 )     (8,512 )     (2,014 )     —         (18,380 )
    


 


 


 


 


 


Net (loss) income

   $ (28,445 )   $ (26,924 )   $ (20,315 )   $ 1,813     $ 45,426     $ (28,445 )
    


 


 


 


 


 


 

23


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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

(Dollars in thousands)

 

     Parent

    CBRE

    Guarantor
Subsidiaries


   Nonguarantor
Subsidiaries


    Elimination

    Consolidated
Total


 

Revenue

   $ —       $ —       $ 1,093,752    $ 473,155     $ —       $ 1,566,907  

Costs and expenses:

                                               

Cost of services

     —         —         584,862      212,682       —         797,544  

Operating, administrative and other

     1,179       7,532       406,943      227,362       —         643,016  

Depreciation and amortization

     —         —         25,974      14,027       —         40,001  

Merger-related charges

     —         —         22,038      3,536       —         25,574  
    


 


 

  


 


 


Operating (loss) income

     (1,179 )     (7,532 )     53,935      15,548       —         60,772  

Equity income (loss) from unconsolidated subsidiaries

     —         728       9,634      (242 )     —         10,120  

Interest income

     81       35,521       1,680      501       (35,480 )     2,303  

Interest expense

     4,084       45,480       31,848      6,206       (35,480 )     52,138  

Loss on extinguishment of debt

     7,166       13,909       —        —         —         21,075  

Equity income from consolidated subsidiaries

     6,196       25,347       2,511      —         (34,054 )     —    
    


 


 

  


 


 


(Loss) income before (benefit) provision for income taxes

     (6,152 )     (5,325 )     35,912      9,601       (34,054 )     (18 )

(Benefit) provision for income taxes

     (4,444 )     (11,521 )     10,565      7,090       —         1,690  
    


 


 

  


 


 


Net (loss) income

   $ (1,708 )   $ 6,196     $ 25,347    $ 2,511     $ (34,054 )   $ (1,708 )
    


 


 

  


 


 


 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

(Dollars in thousands)

 

     Parent

    CBRE

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


    Elimination

    Consolidated
Total


 

Revenue

   $ —       $ —       $ 727,394     $ 281,423     $ —       $ 1,008,817  

Costs and expenses:

                                                

Cost of services

     —         —         359,672       124,813       —         484,485  

Operating, administrative and other

     244       2,716       298,302       143,010       —         444,272  

Depreciation and amortization

     —         —         46,704       6,867       —         53,571  

Merger-related charges

     —         —         15,890       3,905       —         19,795  
    


 


 


 


 


 


Operating (loss) income

     (244 )     (2,716 )     6,826       2,828       —         6,694  

Equity income (loss) from unconsolidated subsidiaries

     —         84       9,461       (363 )     —         9,182  

Interest income

     136       29,380       1,916       132       (28,940 )     2,624  

Interest expense

     8,800       39,096       28,491       4,292       (28,940 )     51,739  

Loss on extinguishment of debt

     —         6,840       —         —         —         6,840  

Equity loss from consolidated subsidiaries

     (19,371 )     (10,044 )     (957 )     —         30,372       —    
    


 


 


 


 


 


Loss before benefit for income taxes

     (28,279 )     (29,232 )     (11,245 )     (1,695 )     30,372       (40,079 )

Benefit for income taxes

     (3,659 )     (9,861 )     (1,201 )     (738 )     —         (15,459 )
    


 


 


 


 


 


Net loss

   $ (24,620 )   $ (19,371 )   $ (10,044 )   $ (957 )   $ 30,372     $ (24,620 )
    


 


 


 


 


 


 

24


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CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

(Dollars in thousands)

 

    Parent

    CBRE

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


    Consolidated
Total


 

CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES

  $ (10,948 )   $ (1,049 )   $ 55,910     $ (5,308 )   $ 38,605  

CASH FLOWS FROM INVESTING ACTIVITIES:

                                       

Proceeds from sale of servicing rights and other assets

    —         —         5,435       172       5,607  

Proceeds from sale of property held for sale

    —         —         —         50,401       50,401  

Capital expenditures, net of concessions received

    —         —         (20,204 )     (7,251 )     (27,455 )

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

    —         —         (8,586 )     (8,198 )     (16,784 )

Other investing activities, net

    —         113       (2,257 )     (804 )     (2,948 )
   


 


 


 


 


Net cash provided by (used in) investing activities

    —         113       (25,612 )     34,320       8,821  

CASH FLOWS FROM FINANCING ACTIVITIES:

                                       

Proceeds from the revolver and swingline credit facility

    —         186,750       —         —         186,750  

Repayment of revolver and swingline credit facility

    —         (186,750 )     —         —         (186,750 )

Repayment of senior secured term loan

    —         (17,500 )     —         —         (17,500 )

Repayment of non-recourse debt related to property held for sale

    —         —         —         (42,048 )     (42,048 )

Repayment of euro cash pool and other loans, net

    —         —         (3,146 )     (6,663 )     (9,809 )

Repayment of 9 3/4% senior notes

    —         (70,000 )     —         —         (70,000 )

Repayment of 11 1/4% senior subordinated notes

    —         (21,631 )     —         —         (21,631 )

Repayment of 16% senior notes

    (38,316 )     —         —         —         (38,316 )

Proceeds from issuance of common stock, net

    135,000       —         —         —         135,000  

Proceeds from exercise of stock options

    7,991       —         —         —         7,991  

Payment of deferred financing fees

    —         (3,942 )     —         —         (3,942 )

(Increase) decrease in inter-company receivables, net

    (96,182 )     116,307       (49,838 )     29,713       —    

Other financing activities, net

    (499 )     —         —         (967 )     (1,466 )
   


 


 


 


 


Net cash provided by (used in) financing activities

    7,994       3,234       (52,984 )     (19,965 )     (61,721 )
   


 


 


 


 


NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (2,954 )     2,298       (22,686 )     9,047       (14,295 )

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

    3,008       17       148,752       12,104       163,881  

Effect of currency exchange rate changes on cash

    —         —         —         (1,661 )     (1,661 )
   


 


 


 


 


CASH AND CASH EQUIVALENTS, AT END OF PERIOD

  $ 54     $ 2,315     $ 126,066     $ 19,490     $ 147,925  
   


 


 


 


 


SUPPLEMENTAL DATA:

                                       

Cash paid during the period for:

                                       

Interest, net of amount capitalized

  $ 7,050     $ 45,695     $ 1,156     $ 2,945     $ 56,846  
   


 


 


 


 


Income taxes, net of refunds

  $ 11,462     $ —       $ —       $ —       $ 11,462  
   


 


 


 


 


 

25


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

(Dollars in thousands)

 

    Parent

    CBRE

    Guarantor
Subsidiaries


    Nonguarantor
Subsidiaries


    Consolidated
Total


 

CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES

  $ (46,824 )   $ 28,930     $ (31,706 )   $ (21,114 )   $ (70,714 )

CASH FLOWS FROM INVESTING ACTIVITIES:

                                       

Capital expenditures, net of concessions received

    —         —         (9,163 )     978       (8,185 )

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

    —         —         (243,847 )     —         (243,847 )

Other investing activities, net

    —         26       2,638       (3,316 )     (652 )
   


 


 


 


 


Net cash provided by (used in) investing activities

    —         26       (250,372 )     (2,338 )     (252,684 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                                       

Proceeds from revolver and swingline credit facility

    —         152,850       —         —         152,850  

Repayment of revolver and swingline credit facility

    —         (152,850 )     —         —         (152,850 )

Proceeds from senior secured term loans

    —         75,000       —         —         75,000  

Repayment of senior secured term loans

    —         (7,513 )     —         —         (7,513 )

Repayment of notes payable

    —         (43,000 )     —         —         (43,000 )

Proceeds from 9 3/4% senior notes

    —         200,000       —         —         200,000  

Proceeds from short-term borrowings and other loans, net

    —         —         —         3,732       3,732  

Proceeds from issuance of common stock, net

    120,580       —         —         —         120,580  

(Increase) decrease in inter-company receivables, net

    (53,623 )     (233,711 )     267,207       20,127       —    

Other financing activities, net

    (194 )     (19,766 )     —         (341 )     (20,301 )
   


 


 


 


 


Net cash provided by (used in) financing activities

    66,763       (28,990 )     267,207       23,518       328,498  
   


 


 


 


 


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    19,939       (34 )     (14,871 )     66       5,100  

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

    127       54       74,173       5,347       79,701  

Effect of currency exchange rate changes on cash

    —         —         —         693       693  
   


 


 


 


 


CASH AND CASH EQUIVALENTS, AT END OF PERIOD

  $ 20,066     $ 20     $ 59,302     $ 6,106     $ 85,494  
   


 


 


 


 


SUPPLEMENTAL DATA:

                                       

Cash paid during the period for:

                                       

Interest, net of amount capitalized

  $ 4,038     $ 21,949     $ 1,371     $ 4,336     $ 31,694  
   


 


 


 


 


Income taxes, net of refunds

  $ 25,533     $ —       $ —       $ —       $ 25,533  
   


 


 


 


 


 

26


Table of Contents

CB RICHARD ELLIS GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

19.    Industry Segments

 

We report our operations through three geographically organized segments: (1) Americas, (2) Europe, Middle East and Africa (EMEA) and (3) Asia Pacific. The Americas consist of operations in the U.S., Canada, Mexico and South America. EMEA mainly consists of operations in Europe, while Asia Pacific includes operations in Asia, Australia and New Zealand. Summarized financial information by operating segment is as follows (dollars in thousands):

 

    Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
    2004

    2003

    2004

    2003

 

Revenue

                               

Americas

  $ 425,194     $ 324,508     $ 1,148,577     $ 766,995  

EMEA

    110,000       69,390       310,511       167,020  

Asia Pacific

    39,805       29,478       107,819       74,802  
   


 


 


 


    $ 574,999     $ 423,376     $ 1,566,907     $ 1,008,817  
   


 


 


 


Operating income (loss)

                               

Americas

  $ 35,837     $ (11,914 )   $ 50,162     $ 16,533  

EMEA

    4,649       (13,844 )     1,140       (13,137 )

Asia Pacific

    4,196       3,082       9,470       3,298  
   


 


 


 


      44,682       (22,676 )     60,772       6,694  

Equity income (loss) from unconsolidated subsidiaries

                               

Americas

    4,302       2,536       9,601       9,379  

EMEA

    (60 )     (253 )     (277 )     (361 )

Asia Pacific

    584       35       796       164  
   


 


 


 


      4,826       2,318       10,120       9,182  

Interest income

    672       1,373       2,303       2,624  

Interest expense

    14,919       21,000       52,138       51,739  

Loss on extinguishment of debt

    17,066       6,840       21,075       6,840  
   


 


 


 


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

  $ 18,195     $ (46,825 )   $ (18 )   $ (40,079 )
   


 


 


 


 

20.    New Accounting and Tax Pronouncements

 

On March 31, 2004, the FASB issued its Exposure Draft, “Share-Based Payment”, which is a proposed amendment to SFAS No. 123, “Accounting for Stock-Based Compensation.” The amendment would require all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values, which would include all unvested grants at the time of adoption. The FASB expects to issue a final standard late in 2004. On October 13, 2004, the FASB decided that the final amendment would be effective for public companies for any interim or annual period beginning after June 15, 2005, although early adoption would be encouraged. The adoption of this exposure draft is not expected to have a material impact on our financial position or results of operations.

 

In October 2004, the “American Jobs Creation Act of 2004” was passed. We are currently assessing the impact of this law on our operations, particularly relative to provisions on repatriation of foreign earnings as well as deferred compensation. We do not expect this act to have a material impact on our financial position or results of operations.

 

27


Table of Contents
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q for CB Richard Ellis Group, Inc. for the quarter ended September 30, 2004, represents an update to the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K/A for the year ended December 31, 2003. Accordingly, you should read the following discussion in conjunction with the information included in the Annual Report on Form 10-K/A as well as the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

Overview

 

We are the largest global commercial real estate services firm, based on 2003 revenue, offering a full range of services to occupiers, owners, lenders and investors in office, retail, industrial, multi-family and other commercial real estate assets. As of December 31, 2003, excluding affiliate and partner offices, we operated in 220 offices worldwide with over 13,500 employees providing commercial real estate services under the “CB Richard Ellis” brand name. Our business is focused on several service competencies, including strategic advice and execution assistance for property leasing and sales, forecasting, valuations, origination and servicing of commercial mortgage loans, facilities and project management and real estate investment management. We generate revenues both on a per project or transaction basis and from annual management fees.

 

When you read our financial statements and the information included in this section, you should consider that we have experienced, and continue to experience, several material trends and uncertainties that have affected our financial condition and results of operations and make it challenging to predict our future performance based on our historical results. We believe that the following material trends and uncertainties are most crucial to an understanding of the variability in our historical earnings and cash flows and the potential for such variances in the future:

 

Macroeconomic Conditions

 

Economic trends and government policies directly affect our operations as well as global and regional commercial real estate markets generally. These include: overall economic activity and employment growth, interest rate levels, the availability of credit to finance transactions and the impact of tax and regulatory policies. Periods of economic slowdown or recession, significantly rising interest rates, a declining employment level, a declining demand for real estate or the public perception that any of these events may occur, can reduce volumes for many of our business lines. Weak economic conditions could result in a general decline in rents, which, in turn, would reduce revenue from property management fees and brokerage commissions derived from property sales and leases. In addition, these conditions could lead to a decline in sales prices as well as a decline in funds invested in commercial real estate and related assets. An economic downturn or a significant increase in interest rates also may reduce the amount of loan originations and related servicing by our commercial mortgage banking business. If our brokerage and mortgage banking businesses are negatively impacted, it is likely that our other lines of business would also suffer due to the relationship among our various business lines.

 

During 2002 and 2001, we were adversely affected by the slowdown in the United States (U.S.) economy, which negatively impacted the commercial real estate market generally. This caused a decline in our leasing activities within the U.S. Moreover, in part because of the terrorist attacks on September 11, 2001 and the run-up to the conflict with Iraq, the economic climate in the U.S. became very uncertain, which had an adverse effect on commercial real estate market conditions and, in turn, our operating results for 2002 and 2001. During 2003 and the first three-quarters of 2004, economic conditions in the U.S. improved, which positively impacted the commercial real estate market generally. This caused an improvement in our Americas segment’s revenue, particularly in sales and leasing activities. We expect this trend to continue in the near term.

 

Our management team primarily addresses adverse changes in economic conditions through our compensation structure. Compensation is our largest expense and the sales and leasing professionals in our largest line of business, Advisory Services, generally are paid on a commission and bonus basis that correlates

 

28


Table of Contents

with our revenue performance. As a result, the negative effect on our operating margins during difficult market conditions is partially mitigated. In addition, in circumstances when economic conditions are particularly severe, our management also has sought to improve operational performance through cost reduction programs. For example, as economic conditions worsened in 2001, our management team made targeted reductions in our workforce, reduced senior management bonuses, streamlined general and administrative operations and cut capital expenditures and other discretionary operating expenses. After our acquisition of CB Richard Ellis Services in 2001, our management team also instituted a “best practices” program branded “People, Platform & Performance” in order to implement and encourage new business practices that would result in lower operating expenses and enhanced revenue and margin growth. We believe this program significantly contributed to the $18.7 million reduction in our operating expenses during 2002 as compared to 2001. Notwithstanding these approaches, adverse global and regional economic changes remain one of the most significant risks to our future financial condition and results of operations.

 

Effects of Prior Acquisitions

 

Our management historically has made significant use of strategic acquisitions to add new service competencies, to increase our scale within existing competencies and to expand our presence in various geographic regions around the world. For example, we enhanced our mortgage banking services through our 1996 acquisition of L.J. Melody & Company (L.J. Melody) and we significantly increased the scale of our investment management business through our 1995 acquisition of Westmark Realty Advisors and our 1997 acquisition of Koll Real Estate Services. An example of a strategic acquisition that increased our geographic coverage was our 1998 acquisition of Hillier Parker May & Rowden in the United Kingdom (U.K.). Our largest acquisition to date was our July 23, 2003 acquisition of Insignia Financial Group, Inc. (Insignia), which not only significantly increased the scale of our real estate advisory services and outsourcing services business lines in the Americas segment but also significantly increased our presence in the New York, London and Paris metropolitan areas.

 

Although our management believes that strategic acquisitions can significantly decrease the cost, time and commitment of management resources necessary to attain a meaningful competitive position within targeted markets or to expand our presence within our current markets, our management also believes that most acquisitions will initially have an adverse impact on our operating and net income, both as a result of transaction-related expenditures and charges and the costs of integrating the acquired business and its financial and accounting systems into our own. For example, through September 30, 2004, we have incurred $200.9 million of transaction-related expenditures in connection with our acquisition of Insignia in 2003 and $87.6 million of transaction-related expenditures in connection with our acquisition of CB Richard Ellis Services in 2001. Transaction-related expenditures include severance costs, lease termination costs, transaction costs, deferred financing costs and merger-related costs, among others. We do not expect to incur any additional transaction-related expenditures after September 30, 2004 with respect to the Insignia Acquisition. In addition, through September 30, 2004, we have incurred $25.4 million of expenses in connection with the integration of Insignia’s business lines, as well as accounting and other systems, into our own. We expect to incur additional integration expenses in connection with the Insignia integration of approximately $2.5 million during the fourth quarter of 2004, approximately $6.5 million during 2005 and approximately $4.0 million during 2006.

 

International Operations

 

We have made significant acquisitions of non-U.S. companies and, we may acquire additional foreign companies in the future. As we increase our foreign operations through either acquisitions or organic growth, fluctuations in the value of the U.S. dollar relative to the other currencies in which we may generate earnings could adversely affect our business, financial condition and operating results. Our management team generally seeks to mitigate our exposure by balancing assets and liabilities that are denominated in the same currency and by maintaining cash positions outside the U.S. only at levels necessary for operating purposes. In addition, from time to time we enter into foreign currency forward exchange contracts to mitigate our exposure to exchange rate changes related to particular transactions. Prior to 2004, our management historically had not entered into agreements to hedge the risks associated with the translation of foreign currencies into U.S. dollars. On April 6, 2004, we entered

 

29


Table of Contents

into an option agreement to purchase an aggregate notional amount of 8.7 million British pounds sterling for a cost of $0.6 million, which would have expired on December 29, 2004. On July 2, 2004, we entered into an option agreement to purchase an aggregate notional amount of 18.8 million euros for a cost of $0.7 million, which also would have expired on December 29, 2004. During October 2004, we sold both of these option agreements and entered into two new option agreements to purchase an aggregate notional amount of 10.2 million British pounds sterling for a cost of $0.3 million and 20.0 million euros for a cost of $0.4 million, both of which expire on December 29, 2004. The net impact on our earnings resulting from gains and/or losses on these option agreements has not been, and is not expected to be, material. Due to the constantly changing currency exposures to which we are subject and the volatility of currency exchange rates, our management cannot predict the effect of exchange rate fluctuations upon future operating results. In addition, fluctuations in currencies relative to the U.S. dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations.

 

Our international operations also are subject to, among other things, political instability and changing regulatory environments, which may adversely affect our future financial condition and results of operations. Our management routinely monitors these risks and costs and evaluates the appropriate amount of resources to allocate towards business activities in foreign countries where such risks and costs are particularly significant.

 

Leverage

 

We are highly leveraged and have significant debt service obligations. Although our management believes that the incurrence of this long-term indebtedness has been important in funding the growth of our business, including facilitating our acquisition of Insignia in 2003, the cash flow necessary to service this debt is not available for other general corporate purposes, which may limit our flexibility in planning for, or reacting to, changes in our business and in the commercial real estate advisory services industry.

 

Our management seeks to mitigate this exposure both through the refinancing of debt when available on attractive terms and through selective repayment and retirement of indebtedness. For example, we refinanced our senior secured credit facilities in October 2003 to obtain more attractive interest rates and other terms, redeemed $30.0 million in aggregate principal amount of our 16% senior notes in late 2003 and repurchased $21.6 million in aggregate principal amount of our 11 1/4% senior subordinated notes in the open market during May and June 2004.

 

In addition, on June 15, 2004 we received aggregate net proceeds of approximately $135.0 million, after deducting underwriting discounts and commissions and offering expenses payable by us, in connection with the sale of 7,726,764 shares of our Class A common stock pursuant to the completion of our initial public offering. During June 2004, we used a portion of the net proceeds received from the offering to prepay $15.0 million in principal amount of the term loan under our amended and restated credit agreement and during July 2004, we used the remaining net proceeds we received from the offering to redeem all $38.3 million in aggregate principal amount of our remaining outstanding 16% senior notes and $70.0 million in aggregate principal amount of our 9 3/4% senior notes. Our management expects to continue to look for opportunities to reduce our debt in the future.

 

Notwithstanding the actions described above, however, our level of indebtedness and the operating and financial restrictions in our debt agreements, both place constraints on the operation of our business.

 

Critical Accounting Policies

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements. A discussion of such critical accounting policies, which include goodwill and other intangible assets, revenue recognition and our consolidation policy can be found in our Annual Report on Form 10-K/A for the year ended December 31, 2003. There have been no material changes to these policies in 2004.

 

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Basis of Presentation

 

Recent Significant Acquisitions and Dispositions

 

On July 23, 2003, pursuant to an amended and restated agreement and plan of merger, dated as of May 28, 2003, by and among CB Richard Ellis Services, CB Richard Ellis Group, Apple Acquisition Corp., a Delaware corporation and wholly owned subsidiary of CB Richard Ellis Services, 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 CB Richard Ellis Services.

 

The consolidated statements of operations and cash flows for the three and nine months ended September 30, 2004 include full periods of activity for Insignia. However, the consolidated statements of operations and cash flows for the three and nine months ended September 30, 2003 include the activity of Insignia from July 23, 2003, the date of the Insignia Acquisition. As such, our consolidated financial statements after the Insignia Acquisition are not directly comparable to our consolidated financial statements prior to the Insignia Acquisition.

 

Segment Reporting

 

We report our operations through three geographically organized segments: (1) Americas, (2) Europe, the Middle East and Africa (EMEA), and (3) Asia Pacific. The Americas consists of operations located in the U.S., Canada, Mexico and South America. EMEA mainly consists of operations in Europe, while Asia Pacific includes operations in Asia, Australia and New Zealand.

 

Results of Operations

 

The following tables set forth items derived from the consolidated statements of operations for the three and nine months ended September 30, 2004 and 2003 presented in dollars and as a percentage of revenue (dollars in thousands):

 

   

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
    2004

    2003

    2004

    2003

 

Revenue

  $ 574,999   100.0 %   $ 423,376     100.0 %   $ 1,566,907     100.0 %   $ 1,008,817     100.0 %

Costs and expenses:

                                                     

Cost of services

    300,711   52.3       207,820     49.1       797,544     50.9       484,485     48.0  

Operating, administrative and other

    213,226   37.1       180,676     42.7       643,016     41.0       444,272     44.0  

Depreciation and amortization

    12,340   2.1       41,071     9.7       40,001     2.6       53,571     5.3  

Merger-related charges

    4,040   0.7       16,485     3.9       25,574     1.6       19,795     2.0  
   

 

 


 

 


 

 


 

Operating income (loss)

    44,682   7.8       (22,676 )   (5.4 )     60,772     3.9       6,694     0.7  

Equity income from unconsolidated subsidiaries

    4,826   0.8       2,318     0.5       10,120     0.6       9,182     0.9  

Interest income

    672   0.2       1,373     0.4       2,303     0.2       2,624     0.2  

Interest expense

    14,919   2.6       21,000     5.0       52,138     3.4       51,739     5.1  

Loss on extinguishment of debt

    17,066   3.0       6,840     1.6       21,075     1.3       6,840     0.7  
   

 

 


 

 


 

 


 

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

    18,195   3.2       (46,825 )   (11.1 )     (18 )   0.0       (40,079 )   (4.0 )

Provision (benefit) for income taxes

    6,300   1.1       (18,380 )   (4.4 )     1,690     0.1       (15,459 )   (1.6 )
   

 

 


 

 


 

 


 

Net income (loss)

  $ 11,895   2.1 %   $ (28,445 )   (6.7 )%   $ (1,708 )   (0.1 )%   $ (24,620 )   (2.4 )%
   

 

 


 

 


 

 


 

EBITDA

  $ 61,848   10.8 %   $ 20,713     4.9 %   $ 110,893     7.1 %   $ 69,447     6.9 %
   

 

 


 

 


 

 


 

 

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EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization. Our management believes EBITDA is useful in evaluating our performance compared to that of other companies in our industry because the calculation of EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions, which items may vary for different companies for reasons unrelated to overall operating performance. As a result, our management uses EBITDA as a measure to evaluate the performance of our various business lines and for other discretionary purposes, including as a significant component when measuring our performance under our employee incentive programs.

 

However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles (GAAP), and when analyzing our operating performance, readers should use EBITDA in addition to, and not as an alternative for, operating income (loss) and net income (loss), each as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as tax and debt service payments. The amounts shown for EBITDA also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges and are used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments.

 

EBITDA is calculated as follows (dollars in thousands):

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2004

   2003

    2004

    2003

 

Net income (loss)

   $ 11,895    $ (28,445 )   $ (1,708 )   $ (24,620 )

Add:

                               

Depreciation and amortization

     12,340      41,071       40,001       53,571  

Interest expense

     14,919      21,000       52,138       51,739  

Loss on extinguishment of debt

     17,066      6,840       21,075       6,840  

Provision (benefit) for income taxes

     6,300      (18,380 )     1,690       (15,459 )

Less:

                               

Interest income

     672      1,373       2,303       2,624  
    

  


 


 


EBITDA

   $ 61,848    $ 20,713     $ 110,893     $ 69,447  
    

  


 


 


 

Three Months Ended September 30, 2004 Compared to the Three Months Ended September 30, 2003

 

We reported consolidated net income of $11.9 million for the three months ended September 30, 2004 on revenue of $575.0 million as compared to a consolidated net loss of $28.4 million on revenue of $423.4 million for the three months ended September 30, 2003.

 

Our revenue on a consolidated basis increased by $151.6 million, or 35.8%, as compared to the three months ended September 30, 2003. The increase was primarily driven by significant organic growth, fueled by generally improved market conditions in the United States as well as the contribution from Insignia’s operations for a full quarter in the current period as compared to part of the quarter in the prior year period. This resulted in higher revenues in our Americas business segment, particularly relative to sales and lease transaction revenue. In addition, we experienced higher consultation fees as well as increased sales and lease transaction revenue in our EMEA business segment primarily due to the Insignia Acquisition as well as organic growth. Foreign currency translation had a $13.6 million positive impact on total revenue during the three months ended September 30, 2004.

 

Our cost of services on a consolidated basis totaled $300.7 million, an increase of $92.9 million, or 44.7%, as compared to the three months ended September 30, 2003. Our sales and leasing professionals are generally paid on a commission and bonus basis, which substantially correlates with our revenue performance. Accordingly, the overall increase was primarily driven by the increase in revenue. The Insignia Acquisition

 

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resulted in higher payroll-related costs, including bonus accruals, insurance and benefits, producer retention and broker draw amortization. Producer retention bonuses were paid to the top real estate advisory services professionals that we retained in the acquisition. The producer retention expense represents the amortization of these bonuses, which are being amortized through cost of services over the lives of related employment agreements. Foreign currency translation had a $6.1 million negative impact on cost of services during the three months ended September 30, 2004. Cost of services as a percentage of revenue increased from 49.1% in the prior year quarter to 52.3% in the current year quarter primarily driven by producers reaching higher commission tranches as a result of higher revenue as well as due to producer retention and broker draw amortization recorded in 2004.

 

Our operating, administrative and other expenses on a consolidated basis totaled $213.2 million, an increase of $32.6 million, or 18.0%, for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003. The increase was primarily driven by higher payroll related costs, marketing expenses and professional fees, including $1.9 million in the current quarter related to the ongoing Sarbanes-Oxley compliance work. Additionally, operating expenses were higher in the current period as a result of $3.0 million in write-downs of investments in our Americas business segment as well as higher occupancy expenses, particularly in our EMEA business segment. Finally, foreign currency translation had a $6.3 million negative impact on total operating expenses during the three months ended September 30, 2004.

 

Our depreciation and amortization expense on a consolidated basis decreased by $28.7 million, or 70.0%, for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003. The decrease was largely due to lower amortization expense related to intangibles acquired in the Insignia Acquisition, including a reduction in amortization expense of $28.5 million related to acquired net revenue backlog. As of September 30, 2004, the net book value of the intangible asset representing the remaining net revenue backlog acquired in the Insignia Acquisition was $2.8 million, which is expected to be fully amortized by the end of 2004.

 

Our merger-related charges on a consolidated basis were $4.0 million and $16.5 million for the three months ended September 30, 2004 and 2003, respectively. The charges for the quarter ended September 30, 2004 primarily consisted of lease termination costs associated with a final space vacated in the current year quarter as a result of the Insignia Acquisition. The charges for the quarter ended September 30, 2003 mainly consisted of lease termination costs associated with vacated spaces as well as consulting and severance costs, all of which were related to the Insignia Acquisition.

 

Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $2.5 million, or 108.2%, for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003, primarily due to a one-time fee of $0.9 million received from an investment fund as well as improved overall performance of our equity investments in the United States and Japan.

 

Our consolidated interest expense was $14.9 million for the three months ended September 30, 2004, a decrease of $6.1 million, or 29.0%, as compared to the three months ended September 30, 2003. This decline was primarily driven by the interest savings realized as a result of debt repayments during the fourth quarter of 2003 and throughout 2004. We expect to achieve annual cash interest savings in 2005 of approximately $16.0 million as a result of our de-leveraging efforts in 2004.

 

Our loss on extinguishment of debt on a consolidated basis was $17.1 million and $6.8 million for the three months ended September 30, 2004 and 2003, respectively. The loss incurred for the quarter ended September 30, 2004 related to the write-offs of unamortized deferred financing fees and unamortized discount, as well as premiums paid, all in connection with the redemptions of $70.0 million in aggregate principal amount of our 9 3/4% senior notes and $38.3 million in aggregate principal amount of our 16.0% senior notes with the net proceeds received from our initial public offering. The loss incurred in the prior year quarter related to the write-off of unamortized deferred financing fees associated with a prior credit facility, which was replaced in connection with the Insignia Acquisition.

 

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Our provision for income taxes on a consolidated basis was $6.3 million for the three months ended September 30, 2004 as compared to a benefit for income taxes of $18.4 million for the three months ended September 30, 2003. The effective tax rate was a 39.3% benefit in the three months ended September 30, 2003 versus a 34.6% provision in the three months ended September 30, 2004. The decrease in the tax rate was primarily related to the favorable tax return-to-book provision reconciliation during the third quarter.

 

Nine Months Ended September 30, 2004 Compared to the Nine Months Ended September 30, 2003

 

We reported a consolidated net loss of $1.7 million for the nine months ended September 30, 2004 on revenue of $1.6 billion as compared to a consolidated net loss of $24.6 million on revenue of $1.0 billion for the nine months ended September 30, 2003.

 

Our revenue on a consolidated basis increased by $558.1 million, or 55.3%, as compared to the nine months ended September 30, 2003. The increase was primarily driven by the combination of the Insignia Acquisition and organic market share growth sustained by the improvement of general economic conditions in the United States. This was evidenced by higher revenues in our Americas and EMEA business segments, particularly relative to sales and lease transaction revenue as well as management and consulting fees. In addition, in our EMEA business segment we experienced an increase in appraisal fees. Also, with the anticipation of rising interest rates in the United States during the first part of the year, we experienced an increase in loan origination fees in our Americas business segment. Foreign currency translation had a $46.8 million positive impact on total revenue during the nine months ended September 30, 2004.

 

Our cost of services on a consolidated basis increased by $313.1 million, or 64.6%, as compared to the nine months ended September 30, 2003. As previously mentioned, our sales and leasing professionals generally are paid on a commission and bonus basis, which substantially correlates with our revenue performance. Accordingly, the overall increase was primarily driven by the overall increase in revenue. The Insignia Acquisition has contributed to higher payroll-related costs, including bonus accruals, insurance and benefits, producer retention and broker draw amortization. The producer retention expense, which represents amounts paid to the top real estate advisory services professionals that we retained at the time of the acquisition, is being amortized through cost of services over the lives of the related employment agreements. As part of our refinement of the purchase price allocation for the Insignia Acquisition, during the three months ended March 31, 2004, we assigned a $6.6 million fair value to a broker draw asset acquired in the Insignia Acquisition. Based on our management’s estimates, we generally derive benefit from brokers participating in our draw program over two years. Accordingly, we estimated that we would derive benefit from the broker draw asset related to Insignia’s brokers over two years from the date of the Insignia Acquisition and, accordingly, we are amortizing it on a straight-line basis, which reflects the pattern in which the economic benefits of the broker draw asset are consumed, during that period. During the nine months ended September 30, 2004, we have recorded $3.9 million for the amortization of this broker draw asset, which includes a $1.4 million adjustment to correct the amortization taken for the period from the date of the Insignia Acquisition through December 31, 2003. The producer retention and the broker draw amortization are considered integration costs associated with the Insignia Acquisition and together amounted to $8.2 million for the nine months ended September 30, 2004. Foreign currency translation had a $20.8 million negative impact on cost of services during the nine months ended September 30, 2004. Cost of services as a percentage of revenue increased from 48.0% for the nine months ended September 30, 2003 to 50.9% for the nine months ended September 30, 2004, primarily driven by producers reaching higher commission tranches as a result of higher revenue and due to the producer retention and broker draw amortization recorded in 2004 as well as the new mix of compensation structures as a result of compensation plans adopted in the Insignia Acquisition.

 

Our operating, administrative and other expenses on a consolidated basis were $643.0 million, an increase of $198.7 million, or 44.7%, for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003. The increase was primarily driven by higher costs as a result of the Insignia Acquisition, including $3.6 million of integration costs, as well as increased worldwide payroll-related expenses,

 

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such as bonuses and insurance and benefits and increased marketing expenses. Higher occupancy expenses, particularly in our EMEA business segment, the write-down of investments of $3.0 million in our Americas business segment as well as professional fees of $2.7 million in the current year related to the ongoing Sarbanes-Oxley compliance work also contributed to the variance. During the current year, we also incurred one-time compensation expense of $15.0 million related to bonus payments that were triggered by our initial public offering and were payable to several of our non-executive real estate advisory services employees as a result of provisions in their employment agreements. Additionally, in 2003 total operating expenses were reduced by substantial net foreign currency transaction gains as the dollar was very weak particularly relative to the Australian and New Zealand dollars, while in the current period we experienced only moderate net foreign currency transaction losses. Finally, foreign currency translation had a $22.5 million negative impact on total operating expenses during the nine months ended September 30, 2004.

 

Our depreciation and amortization expense on a consolidated basis decreased by $13.6 million, or 25.3%, for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003. The decrease was largely due to lower amortization expense related to intangibles acquired in the Insignia Acquisition, including a reduction in amortization expense of $20.7 million related to acquired net revenue backlog. As of September 30, 2004, the net book value of the intangible asset representing the remaining net revenue backlog acquired in the Insignia Acquisition was $2.8 million and is expected to be fully amortized by the end of 2004. Partially offsetting the aforementioned decrease in amortization expense was a $5.2 million increase in depreciation expense during 2004 mainly related to depreciation expense associated with fixed assets acquired in the Insignia Acquisition.

 

Our merger-related charges on a consolidated basis were $25.6 million and $19.8 million for the nine months ended September 30, 2004 and 2003, respectively. The charges for both years primarily consisted of lease termination costs associated with vacated spaces, consulting costs and severance costs, all of which were attributable to the Insignia Acquisition.

 

Our equity income from unconsolidated subsidiaries on a consolidated basis increased $0.9 million, or 10.2%, for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003, primarily due to a one-time incentive fee of $0.9 million received from an investment fund as well as improved overall performance of our equity investments in the United States and Japan. These increases were partially offset, on a year over year comparison basis, by the impact of a one-time gain on the sale of owned units in an investment fund recognized in the prior year.

 

Our consolidated interest expense was $52.1 million for the nine months ended September 30, 2004, which was relatively flat in comparison to the prior year period. The slight increase was driven by higher interest expense as a result of the additional debt issued in connection with the Insignia Acquisition offset by the interest savings realized as a result of debt repayments during the fourth quarter of 2003 and throughout 2004. As a result of our de-leveraging efforts to date in 2004, we expect to achieve annual cash interest savings in 2005 of approximately $16.0 million.

 

Our loss on the extinguishment of debt on a consolidated basis was $21.1 million and $6.8 million for the nine months ended September 30, 2004 and 2003, respectively. The loss incurred during the current year was related to the write-offs of unamortized deferred financing fees and unamortized discount, as well as premiums paid, all in connection with the redemptions of $70.0 million in aggregate principal amount of our 9 3/4% senior notes and $38.3 million in aggregate principal amount of our 16.0% senior notes with the net proceeds received from our initial public offering. Additionally, we incurred a loss of $4.0 million in the second quarter of 2004 related to the write-offs of unamortized deferred financing fees and unamortized discount, as well as premiums paid, in connection with the $21.6 million repurchase of our 11 1/4% senior subordinated notes in the open market during May and June 2004. The loss in the prior year related to the write-off of unamortized deferred financing fees associated with a prior credit facility, which was replaced in connection with the Insignia Acquisition.

 

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Our provision for income taxes on a consolidated basis was $1.7 million for the nine months ended September 30, 2004 as compared to a benefit for income taxes of $15.5 million for the nine months ended September 30, 2003. The unusual tax rate for the nine months ended September 30, 2004 was primarily related to losses sustained in jurisdictions where no tax benefit can be provided .

 

Segment Operations

 

The following table summarizes the revenue, costs and expenses, and operating income (loss) by operating segment for the periods ended September 30, 2004 and 2003 (dollars in thousands). The Americas results for the three months ended September 30, 2004 and 2003, and for the nine months ended September 30, 2004 and 2003, include merger-related charges of $4.0 million, $14.2 million, $22.0 million and $15.9 million, respectively, attributable to the Insignia Acquisition. The EMEA results for the three months ended September 30, 2003 and for the nine months ended September 30, 2004 and 2003, include merger-related charges of $2.3 million, $3.5 million and $3.9 million, associated with the Insignia Acquisition. The Asia Pacific segment did not incur any merger-related charges associated with the Insignia Acquisition.

 

   

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
    2004

    2003

    2004

    2003

 

Americas

                                                   

Revenue

  $ 425,194   100.0 %   $ 324,508     100.0 %   $ 1,148,577   100.0 %   $ 766,995     100.0 %

Costs and expenses:

                                                   

Cost of services

    232,746   54.7       165,013     50.8       614,254   53.5       380,942     49.7  

Operating, administrative and other

    143,526   33.8       129,170     39.8       435,117   37.9       316,352     41.2  

Depreciation and amortization

    9,045   2.1       28,086     8.7       27,007   2.3       37,277     4.8  

Merger-related charges

    4,040   1.0       14,153     4.4       22,037   1.9       15,891     2.1  
   

 

 


 

 

 

 


 

Operating income (loss)

  $ 35,837   8.4 %   $ (11,914 )   (3.7 )%   $ 50,162   4.4 %   $ 16,533     2.2 %
   

 

 


 

 

 

 


 

EBITDA

  $ 49,184   11.6 %   $ 18,708     5.8 %   $ 86,770   7.6 %   $ 63,189     8.2 %
   

 

 


 

 

 

 


 

EMEA

                                                   

Revenue

  $ 110,000   100.0 %   $ 69,390     100.0 %   $ 310,511   100.0 %   $ 167,020     100.0 %

Costs and expenses:

                                                   

Cost of services

    49,413   44.9       30,401     43.8       133,001   42.8       70,782     42.4  

Operating, administrative and other

    53,938   49.1       38,466     55.4       162,740   52.4       91,615     54.9  

Depreciation and amortization

    2,000   1.8       12,035     17.3       10,093   3.3       13,856     8.3  

Merger-related charges

    —     —         2,332     3.4       3,537   1.1       3,904     2.3  
   

 

 


 

 

 

 


 

Operating income (loss)

  $ 4,649   4.2 %   $ (13,844 )   (19.9 )%   $ 1,140   0.4 %   $ (13,137 )   (7.9 )%
   

 

 


 

 

 

 


 

EBITDA

  $ 6,589   6.0 %   $ (2,062 )   (3.0 )%   $ 10,956   3.5 %   $ 358     0.2 %
   

 

 


 

 

 

 


 

Asia Pacific

                                                   

Revenue

  $ 39,805   100.0 %   $ 29,478     100.0 %   $ 107,819   100.0 %   $