As filed with the Securities and Exchange Commission on July 5, 2001
Registration No. 333-59440
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CBRE Holding, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware 6500 94-3391143
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or
Organization) Classification Code Number) Identification Number)
909 Montgomery Street, Suite 400
San Francisco, CA 94133
(415) 434-1111
(Address, including zip code, and telephone number including area code, of
Registrant's principal executive offices)
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Claus Moller, President
CBRE Holding, Inc.
909 Montgomery Street, Suite 400
San Francisco, CA 94133
(415) 434-1111
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Walter Stafford, Esq. Murray Indick, Esq. Richard Capelouto, Esq.
CB Richard Ellis Services, Inc. BLUM Capital Partners, L.P. Simpson Thacher & Bartlett
200North Sepulveda Boulevard, Suite 300 909 Montgomery Street 3330 Hillview Avenue
El Segundo, California 90245 San Francisco, California 94133 Palo Alto, California 94304
(310) 563-8600 (415) 434-1111 (650) 251-5000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION. DATED JULY 5, 2001.
[LOGO OF CB RICHARD ELLIS]
CBRE Holding, Inc.
3,236,639 Shares of Class A Common Stock
1,820,397 Options to Acquire Shares of
Class A Common Stock
-----------
This is an offering by CBRE Holding of (1) shares of its Class A common
stock, including shares for direct ownership, shares to be held in the CB
Richard Ellis Services 401(k) plan and shares underlying stock fund units in
the CB Richard Ellis Services deferred compensation plan, and (2) options to
acquire shares of Class A common stock of CBRE Holding. No public market
currently exists for these shares or options. We do not have any current
intention to apply for a listing of the shares of Class A common stock or the
options on any national securities exchange or for quotation on the Nasdaq
National Market.
Holders of the Class A common stock are generally entitled to one vote per
share on all matters submitted to stockholders of CBRE Holding, while holders
of the Class B common stock of CBRE Holding generally are entitled to ten votes
per share on all matters submitted to stockholders of CBRE Holding. The rights
of the Class A and Class B common stock are the same in all other respects.
Each purchaser of Class A common stock for direct ownership in this offering
will be required to sign a subscription agreement. The subscription agreement
will contain, among other things, significant restrictions on the transfer of
the Class A common stock being offered by this prospectus. Prior to an
underwritten initial public offering, holders of the Class A common stock will
only be able to transfer their shares to specified family members, estate
planning vehicles, affiliates and other employees of us and our subsidiaries,
as well as RCBA Strategic Partners, L.P. and its affiliates. Designated
managers will be prohibited from transferring any shares that are subject to a
right of repurchase. For additional information regarding these transfer
restrictions, you should read the section of this prospectus beginning on page
51. The options being offered by this prospectus are non-transferable.
This offering is being made in connection with the proposed merger of a
wholly-owned subsidiary of CBRE Holding with and into CB Richard Ellis
Services, Inc. pursuant to an amended and restated merger agreement dated as of
May 31, 2001. The consummation of this offering is conditioned upon the
completion of the merger. After the merger, CBRE Holding will be controlled by
RCBA Strategic Partners, L.P. and its affiliates, which will be entitled to
appoint a majority of the members of CBRE Holding's board of directors,
generally be able to control the outcome of all matters submitted to the
stockholders of CBRE Holding and under specified circumstances may require
holders of CBRE Holding's capital stock to sell their shares.
See "Risk Factors" beginning on page 21 to read about factors you should
consider before investing in this offering.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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Per Share Total
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Offering price of shares of Class A common stock........ $16.00 $51,786,224
Offering price of options to acquire shares of Class A
common stock (1)....................................... N/A N/A
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(1) Designated members of management will be eligible to receive grants of
options based on the number of shares of Class A common stock purchased by
these members in the offering.
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Prospectus dated , 2001.
TABLE OF CONTENTS
Page
----
About This Prospectus.................................................... 1
Prospectus Summary....................................................... 2
Risk Factors............................................................. 21
Forward-Looking Statements .............................................. 35
Questions and Answers ................................................... 36
The Offerings............................................................ 41
Determination of the Offering Price...................................... 50
Description of the Offering Documents.................................... 51
Description of the Plans................................................. 62
The Merger Transactions.................................................. 70
Use of Proceeds.......................................................... 84
Dividend Policy.......................................................... 85
Capitalization........................................................... 86
Unaudited Pro Forma Combined Financial Data.............................. 88
Selected Consolidated Financial Data..................................... 105
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 107
Page
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Business................................................................. 128
Management............................................................... 139
Related Party Transactions............................................... 147
Principal Stockholders................................................... 153
Description of Capital Stock............................................. 156
Description of Indebtedness.............................................. 161
Shares Eligible for Future Sale.......................................... 166
U.S. Federal Tax Consequences............................................ 167
U.S. Federal Tax Consequences to Non-U.S. Holders........................ 172
Plan of Distribution..................................................... 174
Legal Matters............................................................ 176
Experts.................................................................. 176
Where You Can Find Additional Information About Us....................... 176
Index to Consolidated Financial Statements and Financial Statement
Schedule................................................................ F-1
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CB Richard Ellis Services, Inc. and the corporate logo of CB Richard Ellis
Services set forth on the cover of this prospectus are the registered
trademarks of CB Richard Ellis Services in the United States. All other
trademarks or service marks are trademarks or service marks of the companies
that use them.
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ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission. Under this registration statement, we may
offer our Class A common stock and options to acquire our Class A common stock
as described in this prospectus. This prospectus provides you with a general
description of the securities we are offering as well as the terms of each
offering. It is important for you to consider the information contained in this
prospectus together with any additional information described under the heading
"Where You Can Find Additional Information About Us" in making your investment
decision.
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and the accompanying
notes appearing elsewhere in this prospectus. Unless otherwise indicated,
information presented on a pro forma basis gives effect to the offers being
made by this prospectus and to our acquisition of CB Richard Ellis Services,
Inc., which will occur substantially simultaneously with the closing of these
offerings. All references to "us," "we," "our" and "CBRE Holding" are to CBRE
Holding, Inc., including what will become its wholly-owned subsidiary, CB
Richard Ellis Services, and the subsidiaries of CB Richard Ellis Services, in
each case after giving effect to the merger described below in the section
titled "Summary of the Merger and Related Financings."
Summary of the Offerings
We have entered into a merger agreement to acquire CB Richard Ellis Services
in a merger transaction. We intend to complete the merger immediately prior to
consummating the offerings described below. The completion of the merger is a
condition to these offerings.
In this prospectus, we use the following terms to describe the offerings
that we are making:
. "Designated managers" refers to our 50 employees who on April, 1 2001
were designated by our board of directors as designated managers and
were notified by us on April 24, 2001 of their designation and who are
employed by us as of the completion of the merger. Our board of
directors made its selection of the designated managers in consultation
with the Chief Executive Officer and Chairman of the Americas of CB
Richard Ellis Services based on the board of directors' and such
officers' subjective determination as to which of our managers had the
potential to have the greatest individual impact on our future growth
and profitability.
. "Non-management employees" refers to all of our directors after the
merger, all of our U.S. employees other than the designated managers and
all of our independent contractors in the states of California, New
York, Illinois and Washington, in each case who are employed or retained
by us as of the completion of the merger.
Description of the Offerings
Shares of Class A common
stock being offered by this
prospectus:
Shares for direct ownership.. 1,187,982 shares
Shares to be held in the CB
Richard Ellis Services 401(k)
plan......................... 889,819 shares
Shares underlying stock fund
units in the CB Richard Ellis
Services deferred
compensation plan............ 1,158,838 shares
Options to acquire Class A
common stock being offered
to the designated managers
by this prospectus .........
1,820,397 options to acquire shares of Class A
common stock
Description of offering of
shares for direct
ownership...................
We are offering up to an aggregate of 1,187,982
shares of our Class A common stock to the
designated managers and the non-management
employees for direct ownership at an offering
price of
2
$16.00 per share. The number of shares being made
available in this offering assumes that both the
offering of shares to be held in the CB Richard
Ellis Services 401(k) plan and the offering of
shares underlying stock fund units in the CB
Richard Ellis Services deferred compensation plan
are fully subscribed for. To the extent shares
are not subscribed for in those other offerings,
we will make an equivalent number of additional
shares available in the offering of shares for
direct ownership.
In connection with the payment of the purchase
price for the shares being offered for direct
ownership, each of the designated managers and
the non-management employees will have the option
to irrevocably assign to us the right to receive
the net cash proceeds that they would otherwise
be entitled to receive in the merger, if any, for
each of the following:
. shares of CB Richard Ellis Services common
stock owned by the designated manager or
non-management employee at the time of the
merger, other than those shares owned
through the CB Richard Ellis Services
401(k) plan; and
. options held by the designated manager or
non-management employee to acquire shares
of CB Richard Ellis Services common stock.
These assigned proceeds would constitute payment
for all or a portion of the shares of our Class A
common stock that the designated manager or non-
management employee decides to acquire in the
offering for direct ownership.
In the event that this offering of shares is
over-subscribed, meaning we receive offers to
purchase more than the 1,187,982 shares we have
set aside for this offering, we first will
allocate a sufficient number of shares to the
designated managers to allow them to subscribe
for the minimum number of shares necessary to
obtain grants of options, as described below, and
all remaining shares then will be allocated
proportionately among all participants in the
offering of shares for direct ownership based
upon the total number of those shares for which
we receive subscriptions.
Grants of options to
designated managers.....
In connection with the offering of shares for
direct ownership, the designated managers will be
eligible to receive an aggregate of up to
1,820,397 options to acquire our Class A common
stock. Unless our board of directors determines
otherwise, a designated manager will receive a
grant of a portion of these options only if he or
she subscribes for a minimum number of shares in
the offering of Class A common stock for direct
ownership. The minimum number of shares that a
designated manager must subscribe for in order to
receive an option grant is a percentage of
625,000 shares that will be allocated to that
designated manager by our board of directors. The
minimum number of shares that a designated
manager must
3
subscribe for in order to receive a grant of
options will be reduced by the number of deferred
compensation plan stock fund units acquired by
the designated manager at the closing of the
offerings by the transfer of account balances
currently allocated to the deferred compensation
plan insurance fund.
If a designated manager subscribes for at least
his or her minimum number of shares, then we will
grant to the designated manager a percentage of
the 1,820,397 total options equal to the
percentage of the 625,000 shares allocated to
that designated manager. Subject to our right to
allocate the shares to be purchased if the
offering is over-subscribed, a designated manager
may subscribe for more than the minimum number of
shares required to receive a grant of options.
However, as long as the minimum number of shares
required to receive an option grant are
subscribed for, the number of options granted to
the designated manager will be the same
regardless of the actual number of shares
subscribed for.
For example, if the percentage of 625,000 shares
that a designated manager must subscribe for is
1%, if the designated manager subscribes for at
least 6,250 shares in the offering for direct
ownership, he or she will be granted 18,204
options, representing 1% of the aggregate options
available for grant to all designated managers.
This will be true even if the designated manager
subscribes for more than 6,250 shares.
The exercise price for each of the options
granted to the designated managers will be $16.00
per share.
Subject to a designated manager's continued
employment with us, all of his or her options
will vest and become exercisable in 20%
increments on each of the first five
anniversaries of the date of the merger. All of
the options will become fully vested and
exercisable upon a change of control of us as
defined in the option agreement. The options will
not be exercisable prior to their vesting.
Subject to early termination if the designated
manager is no longer employed by us, his or her
options will have a term of ten years. The stock
options are not transferable and can only be
exercised by the designated manager or his or her
estate. All of the stock options are intended to
be non-qualified stock options, which means that
the designated managers will be subject to
taxation at ordinary income rates upon their
exercise.
Full-recourse note for
designated managers.....
Under the circumstances described below, a
designated manager may pay a portion of the
purchase price for the shares of Class A common
stock that he or she purchases in this offering
using a full-recourse note having the terms
described below. A full-recourse note is one in
which all of the assets of the borrower, not just
the stock being purchased with the note, are
available to repay the note. The loan represented
by the full-recourse note will be made
4
to you by us or, if we determine, by a bank. If
the loan is made by a bank we will guarantee to
the bank the performance by you of your
obligations under the note.
Unless our board of directors determines
otherwise, in order to use a full-recourse note
in the offering of shares of Class A common stock
for direct ownership a designated manager must
subscribe for the minimum number of shares
required for such designated manager to receive a
grant of options as described above. If the
designated manager satisfies this requirement,
the maximum amount of the full-recourse note that
he or she may use will be equal to 50% of the
aggregate purchase price of the minimum number of
shares that must be subscribed for by the
designated manager in order to receive a grant of
options. The maximum amount of the full recourse
note that may be used by a designated manager
will be reduced by the amount, if any, of the
manager's deferred compensation plan account
balance currently allocated to the insurance fund
that he or she transfers to stock fund units at
the closing of the offerings.
For example, if a designated manager must
subscribe for at least 6,250 shares for direct
ownership in order to receive a grant of options,
then that designated manager may use a full-
recourse note only if he or she subscribes for at
least 6,250 shares. If such designated manager
subscribes for at least 6,250 shares, the maximum
amount of the offering price that may be paid for
by the designated manager using a full-recourse
note is $50,000 minus the amount, if any, of the
designated manager's deferred compensation plan
account balance currently allocated to the
insurance fund that he or she transfers to stock
fund units at the closing of the offerings. The
$50,000 maximum amount of the full recourse note
represents 50% of the $100,000 purchase price for
6,250 shares. This maximum applies even if the
designated manager subscribes for more than 6,250
shares for direct ownership.
The note will accrue interest at a market rate
that we currently expect to be approximately 10%
per year, which interest, unless the note
terminates earlier, will be payable in cash at
the end of each of our fiscal quarters. The note
will have a nine-year term but will be payable in
full prior to the end of that term if the
designated manager's employment is terminated for
any reason.
Pledge agreement..........
If a designated manager pays a portion of the
purchase price for shares in this offering by
delivering a full-recourse note, the designated
manager must pledge as security for the note a
number of shares of our Class A common stock
having an offering price equal to 200% of the
amount of the note. These pledged shares will be
held to secure the repayment of the note. The
pledge agreement will provide that, in the event
the designated manager fails to repay this note,
we or the bank lender, as applicable, can sell
his or her pledged shares to satisfy this
liability. If the proceeds from the sale
5
of the pledged shares are less than the remaining
outstanding balance of the note and the accrued
and unpaid interest, unless the designated
manager previously has died or become disabled,
the unpaid portion of the note will remain
outstanding as an obligation of the designated
manager.
A designated manager may sell pledged shares only
if he or she applies the after-tax proceeds of
the sale to the repayment of the full-recourse
note secured by the pledge. Without our or the
bank lender's, as applicable, prior written
consent, the designated manager may not incur any
liens on the pledged shares or enter into any
agreements that would restrict our or the bank
lender's as applicable, right to transfer the
pledged shares.
Unless the designated manager has defaulted on
the note, the designated manager will retain the
right to vote the pledged shares and to receive
any dividends declared on them, although we or
the bank lender, as applicable, will have a lien
on any dividends regarding those shares received
by the designated manager prior to the repayment
in full of the note.
Description of offering of
shares to be held in the CB
Richard Ellis Services
401(k) plan.................
We are offering to all of our U.S. employees who
are currently participants in the CB Richard
Ellis Services 401(k) plan up to 889,819 shares
of our Class A common stock at an offering price
of $16.00 per share. These shares will be held in
the CB Richard Ellis Services 401(k) plan, which
will be amended to add this new investment
alternative.
To participate in this offering, an employee must
either instruct the trustee of the 401(k) plan to
sell existing investments held by the employee in
the 401(k) plan and use those proceeds to
purchase shares in this offering for his or her
401(k) account, or to use the proceeds received
in the merger for shares of CB Richard Ellis
Services common stock held by the employee in the
401(k) plan, if any, to purchase shares in this
offering for his or her 401(k) account. No
employee may have more than 50% of his or her
entire 401(k) plan account balance invested in
shares of our Class A common stock as of June 1,
2001.
If this offering is over-subscribed, the number
of shares that each participating employee is
able to purchase will be reduced proportionately
based upon the total number of 401(k) plan shares
for which we receive subscriptions.
To the extent that an employee holds shares of CB
Richard Ellis Services common stock in his or her
401(k) plan account and does not elect to use the
merger proceeds received for these shares to
participate in this offering, he or she must
instruct the trustee to invest the excess
proceeds in one or more of the other investment
alternatives that are available under the CB
Richard Ellis Services 401(k) plan.
6
Description of offering of
shares underlying stock
fund units in the
CB Richard Ellis Services'
deferred compensation
plan........................
A number of our current and former U.S. employees
and independent contractors currently hold stock
fund units in the CB Richard Ellis Services
deferred compensation plan. Each stock fund unit
currently gives the person who owns it the right,
subject to any applicable vesting requirements,
to receive one share of CB Richard Ellis Services
common stock on a future distribution date as
described in the plan. The deferred compensation
plan has been amended to provide that, after the
merger, each stock fund unit will entitle its
holder to receive one share of our Class A common
stock on a future distribution date under the
plan, rather than a share of CB Richard Ellis
Services common stock.
Each of our current U.S. employees and our
current independent contractors in the states of
California, New York, Illinois and Washington at
the time of the merger who holds stock fund units
in the CB Richard Ellis Services deferred
compensation plan that have vested prior to the
merger will be entitled to do one of the
following with each of these stock fund units:
. convert the value of the stock fund unit,
based upon a value of $16.00 per stock fund
unit, into the interest index fund
alternative or any of the insurance mutual
fund alternatives that are available under
the deferred compensation plan; or
. continue to hold stock fund units in the
deferred compensation plan.
As part of the investment alternative described
in the second bullet point immediately above, we
are offering up to 996,338 shares of our Class A
common stock that are issuable to these holders
of stock fund units upon future distributions
under the deferred compensation plan.
All participants in the deferred compensation
plan who are not our current U.S. employees or
our current independent contractors in the states
of California, New York, Illinois or Washington
at the time of the merger and hold stock fund
units that have vested prior to the merger must
convert the value of each of these stock fund
units, based upon a value of $16.00 per stock
fund unit, into the interest index fund
alternative or any of the insurance mutual fund
alternatives that are available under the
deferred compensation plan. They will not be
permitted to continue to hold these stock fund
units after the merger.
All stock fund units that have not vested prior
to the time of the merger, including any stock
fund units that will vest as a result of the
merger, will automatically remain in the deferred
compensation plan after the merger and represent
the right to receive shares of our Class A common
stock on future distribution dates as described
in the plan.
7
Our designated managers will also have the right
to transfer into stock fund units an aggregate of
up to $2.6 million of deferred compensation plan
account balances that are currently allocated to
the insurance fund under the deferred
compensation plan. We are offering up to 162,500
shares of our Class A common stock that are
issuable to these holders of stock fund units
upon future distributions under the deferred
compensation plan.
Tax Consequences If You
Subscribe to the
Offerings...................
The tax consequences applicable to you will
depend upon your particular situation, so you
should consult your tax advisor for a full
understanding of the tax consequences to you if
you participate in any of the offerings. In
addition, you should read the sections of this
prospectus titled "U.S. Federal Tax
Consequences," "U.S. Federal Tax Consequences for
Non-U.S. Holders," "Description of the Plans--CB
Richard Ellis Services Deferred Compensation
Plan--Federal Income Tax Consequences of the
Amendments" and "Description of the Plans--2001
Stock Incentive Plan--Federal Income Tax
Consequences of the Awards Under the Stock
Incentive Plan" for a description of tax
consequences to you if you subscribe to any of
the offerings.
Common Stock and Options To
Be Outstanding After the
Offerings...................
2,599,648 shares of Class A common stock
10,605,966 shares of Class B common stock
13,205,614 shares of Class A and Class B common
stock, taken together
This number of shares is based on the closing of
the merger and assumes that each of the offerings
is fully subscribed. The shares outstanding
exclude the following:
. 2,912,636 shares of Class A common stock
initially reserved for issuance upon
exercise of options available for grant
under our 2001 Stock Incentive Plan,
including up to 1,820,397 shares underlying
options granted to the designated managers
in the offerings and up to 910,199 shares
underlying options with an exercise price
of $50.00 per share that will be available
for grant to our employees in the
discretion of our board of directors;
. 1,841,233 shares of Class A common stock
underlying stock fund units; and
. 264,027 shares of Class B common stock
issuable upon the exercise of warrants to
acquire our Class B common stock at an
exercise price of $30.00 per share.
Voting Rights............... The Class A common stock and Class B common stock
vote as a single class on all matters, except as
otherwise required by law, with each share of
Class A common stock entitling its holder to one
vote and each share of Class B common stock
entitling its holder to ten votes. The shares of
Class A common stock and the shares of
8
Class B common stock otherwise have the same
rights. All of the shares of Class B common stock
will initially be owned by members of the buying
group who are described below under the section
titled "Summary of the Merger and Related
Financings."
Subscription Agreements
Generally................... Each of the designated managers and non-
management employees who decides to purchase
shares for direct ownership will be required to
sign a subscription agreement. Any shares
received from the exercise of options by the
designated managers or distributions under the CB
Richard Ellis Services 401(k) plan and deferred
compensation plan will also be subject to the
terms of the subscription agreements.
Description of terms in all
subscription agreements
Transfer restrictions.... Prior to the earlier of the tenth anniversary of
the merger and the date that is 180 days after we
close an underwritten initial public offering in
which our Class A common stock is listed on a
national securities exchange or on the Nasdaq
National Market, the shares subject to the
subscription agreement will have significant
restrictions on transfer. Generally, the only
persons to whom these shares may be transferred
prior to this date are the following:
. specified family members of the employee or
fiduciaries acting on behalf of one of
those family members;
. a trust or other entity, all of the
beneficial interests of which are held by
the employee or a person described in the
immediately prior bullet point;
. us;
. RCBA Strategic Partners, L.P. and its
affiliates;
. FS Equity Partners III, L.P., FS Equity
Partners International, L.P. and their
affiliates; or
. except for any shares subject to a right of
repurchase by us, any of our employees who
agrees to the terms of the subscription
agreement.
If shares are transferred to anyone other than
the persons listed in the third and fourth bullet
points above, the transferee will become subject
to most of the terms of the subscription
agreement. Shares that are subject to a right of
repurchase may not be transferred by a designated
manager. These shares are described below under
"Repurchase right."
The employee will also agree to not transfer any
shares during the 30 days prior to, and up to 180
days after, any underwritten initial public
offering of our Class A common stock.
9
Co-sale right............
Prior to the end of the transfer restrictions, if
a majority of the outstanding shares of our Class
A common stock and Class B common stock, taken
together, are sold to anyone other than RCBA
Strategic and its affiliates, then the employee
will be able to sell the same proportion of his
or her shares of Class A common stock that are
not subject to a right of repurchase as are being
sold by the other selling stockholders. If the
employee exercises this right, the sale of his or
her shares will generally be on the same terms as
the sale of a majority of our outstanding shares
that triggered the right. However, in the event
that the purchaser requires the sale to be
structured as a recapitalization for financial
accounting purposes, then the form of
consideration paid to the majority selling
stockholders may differ from the form paid to the
employee.
Required sale............
To the extent permitted by applicable law, prior
to the end of the transfer restrictions, if a
majority of the outstanding shares of our Class A
common stock and Class B common stock, taken
together, are sold to anyone other than RCBA
Strategic and its affiliates, then those selling
stockholders generally will be able to require
the employee to sell to the same proposed
transferee the same proportion of his or her
shares of Class A common stock as are being sold
by the selling stockholders. If the selling
stockholders exercise this right, the sale of the
employee's shares of Class A common stock will be
on the same terms as the sale of a majority of
our outstanding shares that triggered the sale.
However, in the event that the purchaser requires
the sale to be structured as a recapitalization
for financial accounting purposes, then the form
of consideration paid to the majority selling
stockholders may differ from the form paid to the
employee.
Confidentiality.......... After signing the subscription agreement the
employee will be subject to a confidentiality
provision in the subscription agreement generally
preventing him or her from disclosing any of our
confidential information both during his or her
term of employment by us and for five years
afterwards.
Description of terms in
only the designated manager
subscription agreements
Repurchase right......... If a designated manager's employment with us is
terminated, we will have the right to repurchase
a portion of the shares that he or she purchased
in the offering of shares for direct ownership
for the price described below. The amount of
shares initially subject to this repurchase right
will be the minimum number of shares required for
such designated manager to receive a grant of
options as described above. However, if the
number of shares actually purchased by the
designated manager for direct ownership is less
than this amount, then all of the shares
purchased for direct ownership will initially be
subject to the right of repurchase.
10
For example, if the minimum number of shares that
must be subscribed for by the designated manager
in order to receive a grant of options is 6,250
shares, if such designated manager subscribes for
6,250 shares or more then 6,250 shares will
initially be subject to the right of repurchase.
If the designated manager only purchases 6,000
shares, then all of these shares will initially
be subject to the right of repurchase.
On each of the first five anniversaries of the
merger during which the designated manager
remains employed by us, 20% of the shares
initially subject to repurchase will cease to be
subject to this right. If the designated
manager's employment by us ends, then any
remaining shares subject to repurchase on the
date employment ends will continue to remain
subject to repurchase at all times after that
date.
The price for any shares that we repurchase
pursuant to this right will be the fair market
value of the shares at the time the designated
manager's employment ends, unless the designated
manager was terminated for cause or voluntarily
ended his or her employment for other than a good
reason, in which case the repurchase price will
be the lesser of the fair market value and the
amount that the designated manager paid for those
shares in the offerings.
Shares that are subject to a right of repurchase
may not be transferred by the designated manager.
Sale right............... Prior to the end of the transfer restrictions, if
the designated manager is no longer employed by
us and we have not exercised the repurchase right
at least 20 days prior to the date that the
designated manager's full-recourse note becomes
due, then the designated manager generally may
require us to repurchase the number of shares
held by the designated manager necessary to repay
the note on the date it becomes due. The purchase
price for the shares that we buy upon exercise of
a designated manager's sale right will be the
same as we would pay if we had exercised the
repurchase right. The entire purchase price for
these shares will be applied to the repayment of
the note. If the purchase price for these shares
is not sufficient to repay the note in full then
the designated manager will remain obligated to
repay the remaining amount of the note.
Tax Election.............
Each designated manager will be required to make
an election under Section 83(b) of the Internal
Revenue Code with respect to any shares purchased
that are subject to repurchase, which election
means that the designated manager will have
taxable ordinary income equal to the excess, if
any, of the fair market value of the shares over
the amount the designated manager paid for those
shares. However, we believe that the purchase
price of those shares will be equal to their fair
market value and accordingly, that the election
will not result in any taxable income to the
designated managers.
11
Use of Proceeds.............
We will contribute the proceeds of the offerings,
the proceeds received from the sale of at least
$65.0 million in aggregate principal amount of
our senior notes and related Class A common stock
and the proceeds received by us from the sale of
shares of our Class B common stock to RCBA
Strategic and Blum Strategic Partners II, L.P. to
our subsidiary, BLUM CB Corp. In connection with
the merger of BLUM CB with and into CB Richard
Ellis Services, CB Richard Ellis Services will
use these proceeds, together with the proceeds
from the issuance by BLUM CB of 11 1/4% senior
subordinated notes and borrowings under a new
credit agreement to be entered into by it, for
the following uses:
. payment of $16.00 per share to the holders
of CB Richard Ellis Services common stock
at the time of the merger, other than the
members of the buying group listed on the
next page;
. repayment of substantially all of the
outstanding indebtedness of CB Richard
Ellis Services at the time of the merger;
. loans to be made to Ray Wirta and Donald
Koll to replace existing margin loans;
. payment of the fees and expenses incurred
in connection with the merger transactions
described below and the offerings; and
. working capital and other general corporate
purposes.
For additional information regarding the use of
the proceeds of the offerings, you should read
the section of this prospectus titled "Use of
Proceeds."
12
Summary of the Merger and Related Financings
In this prospectus, we refer to the merger and the related financings
described below, other than the offerings being made by this prospectus, as the
"merger transactions."
Merger Agreement
We are making the offerings in connection with our acquisition of CB Richard
Ellis Services pursuant to the amended and restated merger agreement, dated as
of May 31, 2001, among us, CB Richard Ellis Services and our subsidiary, BLUM
CB Corp. Upon the satisfaction or the waiver of conditions described in the
merger agreement, BLUM CB will merge into CB Richard Ellis Services. The
stockholders of CB Richard Ellis Services at the time of the merger, other than
the buying group described below who will receive shares of our Class B common
stock instead, will have the right to receive $16.00 in cash for each share of
CB Richard Ellis Services common stock that they own. As a result of this
merger, CB Richard Ellis Services will become the direct, wholly-owned
subsidiary of CBRE Holding and the common stock of CB Richard Ellis Services
will be delisted from the New York Stock Exchange. Accordingly, CB Richard
Ellis Services will no longer be a publicly traded company after the merger.
This prospectus relates to offerings by us of (1) shares of CBRE Holding
Class A common stock, including shares for direct ownership, shares to be held
in the CB Richard Ellis Services 401(k) plan and shares underlying stock fund
units in the CB Richard Ellis Services deferred compensation plan, and (2)
options to acquire shares of CBRE Holding Class A common stock. The proceeds
from these offerings will be used to fund in part the merger transactions. The
offerings being made by this prospectus are conditioned upon completion of the
merger.
The Buying Group
Contribution and Voting Agreement
On May 31, 2001, an amended and restated contribution and voting agreement
was signed by the following persons:
. RCBA Strategic, which is an affiliate of BLUM Capital Partners, L.P. and
Richard Blum and Claus Moller, each of whom will be one of our directors
after the merger;
. FS Equity Partners III, L.P. and FS Equity Partners International, L.P.,
which we refer to together as "Freeman Spogli," which are affiliates of
Freeman Spogli & Co. Incorporated and Bradford Freeman, who will be one
of our directors after the merger;
. Raymond Wirta, who will be one of our directors and our Chief Executive
Officer after the merger;
. Brett White, who will be one of our directors and our Chairman of the
Americas after the merger;
. The Koll Holding Company, which is controlled by Donald Koll, who is a
director of CB Richard Ellis Services prior to the merger; and
. Frederic Malek, who is a director of CB Richard Ellis Services prior to
the merger.
In this prospectus, we refer to RCBA Strategic and Blum Strategic Partners II,
L.P. as the "BLUM Funds" and the BLUM Funds together with the persons
identified in each of the preceding bullet points as the "buying group." As of
the date of the prospectus, the members of the buying group and their
affiliates beneficially own approximately 39% of the outstanding shares of CB
Richard Ellis Services common stock.
13
Pursuant to the amended and restated contribution and voting agreement,
immediately prior to the merger, each of the members of the buying group will
contribute to us all of the shares of CB Richard Ellis Services common stock
that he or it directly owns. Each of these shares contributed to us will be
cancelled as a result of the merger. We will issue one share of our Class B
common stock in exchange for each share of CB Richard Ellis Services common
stock contributed to us. This will result in the issuance to the buying group
of an aggregate of 8,052,087 shares of our Class B common stock in exchange for
these contributions. For purposes of our financial statements, the 8,052,087
shares of CB Richard Ellis Services common stock being contributed to us along
with warrants to be issued to Freeman Spogli will be valued at $122,507,229.
Other than 2,345,900 of the shares being contributed to us by RCBA Strategic
that we will value at RCBA Strategic's historical equity basis of $12.87 per
share for purposes of our financial statements, all of the shares of CB Richard
Ellis Services common stock being contributed to us by the buying group are
being valued at $16.00 per share. The $16.00 per share value is the same amount
per share as the amount of cash that stockholders of CB Richard Ellis Services,
other than the members of the buying group, will receive for their shares in
the merger. The $16.00 per share value is also the offering price of the shares
of our Class A common stock being offered by this prospectus.
Also pursuant to the amended and restated contribution and voting agreement,
the BLUM Funds have agreed to purchase for cash immediately prior to the merger
a minimum of 2,553,879 shares of our Class B common stock at $16.00 per share.
In addition, the BLUM Funds have agreed to purchase for $16.00 per share in
cash an additional number of shares of Class B common stock equal to
(1) 3,236,639 shares minus (2) the number of shares of our Class A common stock
and stock fund units subscribed for in the offerings plus (3) the aggregate
amount of full-recourse notes delivered by designated managers divided by
$16.00. The number of shares purchased by the BLUM Funds will be reduced by
241,885 shares, which is the sum of the 10 shares of CBRE Holding common stock
initially owned by RCBA Strategic and the 241,875 shares of CBRE Holding common
stock purchased by RCBA Strategic for $16.00 per share in connection with the
closing of the sale of 11 1/4 senior subordinated notes by BLUM CB Corp. as
described below. The proceeds from the sale of those shares to RCBA Strategic
were contributed to BLUM CB Corp., which deposited the proceeds in an escrow
account for release when the merger is completed. After the offerings have been
completed, depending upon the amount to which the offerings are subscribed, the
shares of our Class B common stock owned by the buying group will be equal to
between approximately 80% and 96% of our outstanding Class A and Class B common
stock, taken together. Only the members of the buying group will have an
opportunity to acquire shares of our Class B common stock.
Securityholders' Agreement
In connection with the closing of the merger, the members of the buying
group, together with DLJ Investment Funding, Inc. and its affiliates, and the
other purchasers of our 16% senior notes and related Class A common stock will
enter into a securityholders' agreement. The shares subject to the
securityholders, agreement will represent a majority of the voting power of our
outstanding Class A and Class B common stock, taken together. Pursuant to the
securityholders' agreement, each of the members of the buying group will agree
to vote each of the shares of Class B common stock it or he beneficially owns
to elect to our board of directors individuals designated by the buying group.
RCBA Strategic will initially designate three of our eight directors and have
the right in its discretion to increase our board of directors by three members
and designate six of eleven members. In addition, Blum Strategic Partners II
will initially designate one director.
Also pursuant to the securityholders' agreement, subject to exceptions, each
member of the buying group other than the BLUM Funds will agree to vote each of
the shares of Class B common stock it or he beneficially owns on matters to be
decided by our stockholders in the same manner as RCBA Strategic votes the
shares of our Class B common stock that it beneficially owns. The exceptions
apply to transactions between the BLUM Funds or their affiliates and us or our
subsidiaries and to amendments to our certificate of incorporation or
14
bylaws that adversely affect the other members of the buying group relative to
the BLUM Funds. As a result, on most matters to be decided by our stockholders
after the merger, RCBA Strategic will be able to control the outcome. Our board
of directors will determine whether an amendment to our certificate of
incorporation or bylaws adversely affects the other members of the buying group
relative to the BLUM Funds. To the extent that a member of the buying group
does not agree with our board of directors determination that an amendment does
not adversely affect such member relative to the BLUM Funds, such member of the
buying group may commence legal action challenging the determination of our
board of directors. The securityholders' agreement also contains terms
regarding transfer restrictions, participation rights, registration rights and
a right of first offer in favor of the BLUM Funds.
Debt Financing for the Merger
In connection with the merger transactions, we will issue and sell to DLJ
Investment Funding, Inc. $65.0 million in aggregate principal amount of our 16%
Senior Notes due 2011 and 521,847 shares of our Class A common stock for an
aggregate purchase price of $65.0 million. Also in connection with the merger,
CB Richard Ellis Services will assume $229 million in aggregate principal
amount of 11 1/4% Senior Subordinated Notes due 2011 issued and sold by BLUM CB
Corp. for approximately $225.6 million on June 7, 2001. The net proceeds from
the sale of those notes by BLUM CB Corp. are currently being held in an escrow
account and will be released when the merger transactions are completed. These
11 1/4 senior subordinated notes are guaranteed by us. In addition, CB Richard
Ellis Services will enter into a new senior secured credit agreement with
Credit Suisse First Boston and other lenders under which CB Richard Ellis
Services will borrow up to $225 million in term loans. The credit agreement
will also include a $100.0 million revolving credit facility, which is intended
to finance our working capital requirements and a portion of which will be
drawn upon at the time of the merger. The credit agreement will be guaranteed
by us and many of the subsidiaries of CB Richard Ellis Services and secured by
a pledge of stock of many of the subsidiaries of CB Richard Ellis Services, as
well as a pledge of substantially all of our other assets. If the merger had
occurred on March 31, 2001, on a pro forma basis we would have incurred an
aggregate of $554.0 million of indebtedness, excluding any additional
borrowings under the revolving credit facility that would have been required to
finance our working capital needs, to finance the merger transactions.
15
Our Structure After the Merger Transactions
The following chart summarizes our corporate structure and the ownership of
our Class A and Class B common stock and stock fund units in the CB Richard
Ellis Services deferred compensation plan after the consummation of the merger
transactions and assuming the offerings are fully subscribed for and no shares
are paid for with full-recourse notes. The ownership summarized in the chart
below does not include options or warrants to purchase our Class A or Class B
common stock.
The BLUM Freeman Other Members Designated 401(k) DLJ Investment
Funds (2) Spogli (2) of the Buying Managers and Plan (3) Funding, Inc.
Group (1)(2) Non-Management and other
Employees (1)(3) purchasers of
our senior
notes
39.3% 22.4% 8.9% 20.1% 5.9% 3.4%
-----------------------------------------------------------------
CBRE
Holding, Inc.
100%
CB Richard Ellis
Services, Inc.
Operating
Subsidiaries
- --------
(1) For the purposes of this chart, all shares owned by Raymond Wirta and Brett
White are included with the Other Members of the Buying Group and not with
the Designated Managers.
(2) These individuals or entities will hold our Class B common stock, which is
entitled to ten votes per share.
(3) These individuals or entities will hold our Class A common stock, which is
entitled to one vote per share, or stock fund units in the CB Richard Ellis
deferred compensation plan, which are nonvoting prior to a distribution of
the underlying Class A common stock under the plan.
16
CBRE Holding, Inc. and CB Richard Ellis Services, Inc.
Our business after the merger will be the same as the business of CB Richard
Ellis Services and its subsidiaries before the merger. CB Richard Ellis
Services is the largest global commercial real estate services firm in terms of
revenue offering a full range of services to commercial real estate occupiers,
owners, lenders and investors. Through its 250 offices, it provides, under the
CB Richard Ellis brand name and the CB Hillier Parker brand name in the United
Kingdom, services on a local, national and international basis across
approximately 100 markets in 44 countries. During 2000, CB Richard Ellis
Services advised on approximately 25,000 lease transactions involving aggregate
rents, under the terms of leases facilitated, of approximately $26.0 billion
and approximately 7,500 sales transactions with transaction values totaling
approximately $26.0 billion. Also during 2000, CB Richard Ellis Services
managed approximately 516 million square feet of property, provided investment
management services for $10.0 billion of assets, originated nearly $7.2 billion
in loans, serviced $16.7 billion in loans, engaged in approximately 32,000
valuation/appraisal and advisory assignments and serviced approximately 1,400
subscribers with proprietary research. In addition, at March 31, 2000
CB Richard Ellis Services employed approximately 9,700 employees.
We filed our certificate of incorporation in Delaware in February 2001 under
the name BLUM CB Holding Corp. We changed our name to CBRE Holding, Inc. in
March 2001. Our principal executive offices are currently located at 909
Montgomery Street, Suite 400, San Francisco, California 94133 and our telephone
number is (415) 434-1111. Following the merger our principal executive offices
will be located at 200 North Sepulveda Boulevard, El Segundo, California 90245-
4380 and our phone number will be (310) 563-8600.
Other Information
Unless otherwise noted, this prospectus assumes the consummation of the
merger transactions.
17
Summary Consolidated Financial Data
The following table is a summary of CB Richard Ellis Services' historical
consolidated financial data for the periods presented, as well as the pro forma
combined financial data of CBRE Holding giving effect to the merger
transactions, the consummation of the offerings and the application of the net
proceeds as described under the section of this prospectus titled "Use of
Proceeds." You should read this data along with the sections of this prospectus
titled "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Unaudited Pro Forma Combined Financial Statements" and the
audited consolidated financial statements and related notes of CB Richard Ellis
Services and CBRE Holding included elsewhere in this prospectus. The unaudited
pro forma combined statement of operations data do not purport to represent
what our results of operations would have been if the merger transactions had
occurred as of the date indicated or what our results will be for future
periods. The results include the activities of two of the companies previously
acquired by CB Richard Ellis Services, namely REI, Ltd. from April 17, 1998,
and Hillier Parker May and Rowden from July 7, 1998. For the year ended
December 31, 1998, basic and diluted loss per share include a deemed dividend
of $32.3 million on the repurchase of CB Richard Ellis Services' preferred
stock. See per share information in Note 9 to the Consolidated Financial
Statements of CB Richard Services and Note 8 to the unaudited pro forma
combined statement of operations.
Pro Forma
Pro Forma for the
Quarter Ended Combined Quarter
Year Ended December 31, March 31, Year Ended Ended
--------------------------------- --------------------- December 31, March 31,
1998 1999 2000 2000 2001 2000 2001
---------- ---------- ---------- ---------- ---------- ------------ ----------
(in thousands, except share and per share numbers and ratios)
Consolidated Statement
of Operations Data:
Revenue................. $1,034,503 $1,213,039 $1,323,604 $ 260,919 $ 272,498 $1,323,604 $ 272,498
Operating income........ 78,476 76,899 107,285 9,239 2,325 101,803 1,317
Interest expense, net... 27,993 37,438 39,146 9,196 8,255 65,687 15,284
Net income.............. 24,557 23,282 33,388 20 (2,846) 10,214 (8,659)
Basic earnings (loss)
per share.............. (0.38) 1.11 1.60 -- (0.13) 0.69 (0.59)
Weighted average shares
outstanding for basic
earnings (loss) per
share.................. 20,136,117 20,998,097 20,931,111 20,819,268 21,309,550 14,720,963 14,720,963
Diluted earnings (loss)
per share.............. $ (0.38) $ 1.10 $ 1.58 $ -- (0.13) $ 0.69 (0.59)
Weighted average shares
outstanding for diluted
earnings (loss) per
share.................. 20,136,117 21,072,436 21,097,240 20,851,184 21,309,550 14,759,486 14,720,963
Ratio of earnings to
fixed charges (1)...... 2.17 1.79 2.15 0.97 0.63 1.43 0.37
---------- ---------- ---------- ---------- ---------- ---------- ----------
18
Pro Forma
Pro Forma for the
Quarter Ended for the Quarter
Year Ended December 31, March 31, Year Ended Ended
----------------------------- ------------------- December 31, March 31,
1998 1999 2000 2000 2001 2000 2001
--------- -------- -------- -------- --------- ------------ ---------
(in thousands)
Other Data:
Net cash (used in)
provided by operating
activities............ $ 76,614 $ 74,011 $ 84,112 $(67,522) $(104,263) $ 84,112 $(104,263)
Net cash (used in)
provided by investing
activities............ (223,520) (26,767) (35,722) 6,314 (536) (35,722) (536)
Net cash (used in)
provided by financing
activities............ 119,438 (37,721) (53,523) 58,794 104,940 (53,523) 104,940
EBITDA, excluding
merger-related and
other nonrecurring
charges (2)........... 127,246 117,369 150,484 19,808 14,021 149,130 13,647
- --------
(1) Includes a deficiency of $0.4 million for the quarter ended March 31, 2000,
a deficiency of $5.2 million for the quarter ended March 31, 2001 and a
deficiency of $13.2 million for the pro forma quarter ended March 31, 2001.
(2) EBITDA, excluding merger-related and other nonrecurring charges, represents
earnings before interest expense, income taxes, depreciation and
amortization of intangible assets and excludes merger-related and other
nonrecurring charges. Our management believes that the presentation of
EBITDA, excluding merger-related and other nonrecurring charges, will
enhance a reader's understanding of our operating performance and ability
to service debt as it provides a measure of cash generated subject to the
payment of interest and income taxes, that can be used by us to service
debt and for other required or discretionary purposes. EBITDA, excluding
merger-related and other nonrecurring charges, should not be considered as
an alternative to operating income determined in accordance with GAAP or
operating cash flow determined in accordance with GAAP. Our calculation of
EBITDA, excluding merger-related and other nonrecurring charges, may not be
comparable to similarly titled measures reported by other companies.
EBITDA, excluding merger related and other nonrecurring charges, is
calculated as follows:
Pro Forma
Pro Forma for the
Quarter Ended Condensed Quarter
Year Ended December 31, March 31, Year Ended Ended
-------------------------- --------------- December 31, March 31,
1998 1999 2000 2000 2001 2000 2001
-------- -------- -------- ------- ------- ------------ ---------
(in thousands)
Operating Income........ $ 78,476 $ 76,899 $107,285 $ 9,239 $ 2,325 $101,806 $ 1,317
Add:
Depreciation and
Amortization.......... 32,185 40,470 43,199 10,569 11,696 47,324 12,330
Merger Related and
Other Nonrecurring
Charges............... 16,585 -- -- -- -- -- --
-------- -------- -------- ------- ------- -------- -------
Adjusted EBITDA........ $127,246 $117,369 $150,484 $19,808 $14,021 $149,130 $13,647
======== ======== ======== ======= ======= ======== =======
19
The following table contains consolidated balance sheet data of CB Richard
Ellis Services as of December 31, 2000 and March 31, 2001 on an actual basis
and CBRE Holding on a pro forma basis. The pro forma data gives effect to the
merger transactions as if they had occurred on March 31, 2001.
Pro Forma
As of As of As of
December 31, March 31, March 31,
2000 2001 2001
------------ --------- ----------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents.................... $ 20,854 $ 20,339 $ 1,485
Total assets................................. 963,105 931,296 1,085,547
Long-term debt, excluding current portion.... 303,571 409,653 516,286
Total liabilities............................ 724,018 704,037 845,557
Total stockholders' equity................... 235,339 224,292 237,023
20
RISK FACTORS
The offerings being made by this prospectus involve a high degree of risk.
You should carefully consider the risks described below and the other
information in this prospectus before deciding to invest in shares of our Class
A common stock or securities exercisable for shares of our Class A common
stock. If any of the following risks or uncertainties actually occur, our
business, financial condition and operating results would likely suffer. In
that event, you could lose all or part of the money you paid in the offerings.
Risks Related to the Merger Transactions
Our substantial leverage could harm our ability to operate our business and
fulfill our debt obligations.
We will be highly leveraged after the closing of the merger transactions and
will have significant debt service obligations. As of March 31, 2001 after
giving effect to the merger transactions on a pro forma basis, we would have
had total debt of approximately $561.7 million (net of $11.7 million of
unamortized discounts), excluding unused commitments under our new revolving
credit facility, and total stockholders' equity of $237.0 million. Our
substantial level of indebtedness increases the possibility that we may be
unable to generate cash sufficient to pay when due the principal of, interest
on or other amounts due in respect to our indebtedness. For fiscal year 2000,
after giving effect to the merger transactions on a pro forma basis, our
interest expense would have been $68.2 million. We may incur additional debt
from time to time to finance strategic acquisitions, investments, joint
ventures or for other purposes, subject to the restrictions contained in our
indebtedness documents.
Our substantial debt could have important consequences to you, including the
following:
. we will be required to use a substantial portion, if not all, of our cash
flow from operations to pay principal and interest on our debt, and our
level of debt may restrict us from raising additional financing on
satisfactory terms to fund working capital, strategic acquisitions,
investments, joint ventures and other general corporate requirements;
. our interest expense could increase if interest rates in general increase
because all of our debt under our credit agreement, including up to $225
million in terms loans and a revolving credit facility of up to
$100 million, bears interest at floating rates generally between LIBOR
plus 3.25% and LIBOR plus 3.75% or between the alternate base rate plus
2.25% and the alternate base rate plus 2.75%;
. our substantial leverage will increase our vulnerability to general
economic downturns and adverse competitive and industry conditions and
could place us at a competitive disadvantage compared to those of our
competitors that are less leveraged;
. our debt service obligations could limit our flexibility in planning for,
or reacting to, changes in our business and in the real estate services
industry generally; and
. our failure to comply with the financial and other restrictive covenants
in our debt instruments, which require us to maintain specified financial
ratios and limit our ability to incur debt and sell assets, could result
in an event of default that, if not cured or waived, could harm our
business or prospects and could result in our bankruptcy.
We cannot be certain that our earnings will be sufficient to allow us to pay
principal and interest on our debt, and meet our other obligations. If we do
not have sufficient earnings, we may be required to refinance all or part of
our existing debt, sell assets, borrow more money or sell more securities. We
cannot guarantee that we will be able to refinance our debt, sell assets,
borrow money or sell more securities on terms acceptable to us or at all.
Our substantial leverage is one of the reasons why an investment in our
Class A common stock is significantly more risky than an existing investment in
CB Richard Ellis Services common stock.
21
Servicing our indebtedness requires a significant amount of cash, and our
ability to generate cash depends on many factors beyond our control.
We expect to obtain from our operations the cash to make payments on our
senior notes, the senior secured credit facilities, the 11 1/4% senior
subordinated notes due 2011 of BLUM CB Corp., which will be assumed by CB
Richard Ellis Services in connection with the merger, and the 8 7/8% senior
subordinated notes due 2006 of CB Richard Ellis Services to the extent not
tendered in connection with the merger transactions, and to fund working
capital, strategic acquisitions, investments, joint ventures and other general
corporate requirements. Our ability to generate cash from our operations is
subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. As a result, we cannot assure
you that our business will generate sufficient cash flow from operations, that
we will realize currently anticipated cost savings, revenue growth and
operating improvements on schedule or at all or that future borrowings will be
available to us under our revolving credit facility, in each case, in amounts
sufficient to enable us to service our debt and to fund our other liquidity
needs. If we cannot service our debt, we will have to take actions such as
reducing or delaying strategic acquisitions, investments and joint ventures,
selling assets, restructuring or refinancing our debt or seeking additional
equity capital. We cannot assure you that any of these remedies could, if
necessary, be effected on commercially reasonable terms, or at all. In
addition, the terms of existing or future debt agreements, including the new
credit agreement and the indentures for the senior notes and the 11 1/4% senior
subordinated notes, may restrict us from adopting any of these alternatives.
We will be able to incur more indebtedness, which may intensify the risks
associated with our substantial leverage, including our ability to service our
indebtedness.
The credit agreement and the indentures relating to the senior notes and the
11 1/4% senior subordinated notes due 2011 will permit us, subject to specified
conditions, to incur a significant amount of additional debt. The conditions to
incurrence of this debt include customary conditions in agreements for senior
bank financing and high yield securities, including a requirement that our
ratio of EBITDA to consolidated interest expense, determined after giving
effect to any proposed new incurrence of debt, not exceed a specified ratio to
be agreed. In addition, we may incur additional debt under our $100 million
revolving credit facility. If we incur additional debt above the levels in
effect upon the closing of the merger transactions, the risks associated with
our substantial leverage, including our ability to service our debt, could
intensify.
If we fail to meet our payment or other obligations under the new credit
agreement, the lenders under our credit agreement could foreclose on, and
acquire control of, substantially all of our assets.
In connection with the incurrence of indebtedness under the new credit
agreement upon the closing of the merger transactions, the lenders under the
new credit agreement will receive a pledge of all of the equity interests of
our significant domestic subsidiaries, including CB Richard Ellis Services, CB
Richard Ellis, Inc., CB Richard Ellis Investors, L.L.C. and L.J. Melody &
Company, and 65% of the voting stock of our foreign subsidiaries that are held
directly by us or our domestic subsidiaries. Additionally, these lenders
generally will have a lien on substantially all of our accounts receivable,
cash, general intangibles, investment property and future acquired material
property. As a result of these pledges and liens, if we fail to meet our
payment or other obligations under the new credit agreement, the lenders under
the credit agreement would be entitled to foreclose on substantially all of our
assets and liquidate these assets. Under those circumstances, the holders of
our Class A common stock may lose the entire value of their investment.
As a result of the merger transactions, we will be controlled by RCBA Strategic
whose interests may be different than yours.
On the closing of the merger transactions, RCBA Strategic will own
approximately 36.7% of our outstanding Class A and Class B common stock, taken
together, assuming (1) the offerings are fully subscribed for and (2) no shares
are paid for by designated managers with full-recourse notes. To the extent
these offerings to employees are not fully subscribed for or are paid for with
full-recourse notes, RCBA Strategic will
22
purchase additional shares of CBRE Holding Class B common stock and its
percentage ownership will increase. In addition, on the closing date, RCBA
Strategic will enter into a securityholders' agreement with the other holders
of our Class B common stock, DLJ Investment Funding, Inc. and the other
purchasers of our senior notes. The Class A and Class B common stock subject to
the securityholders' agreement will represent approximately 87% of the voting
power of our outstanding Class A and Class B common stock, taken together,
assuming the offerings are fully subscribed for and no shares are paid for by
designated managers with full-recourse notes. As a result of the percentage of
our voting power owned by RCBA Strategic and the other parties to the
securityholders' agreement and the rights granted to RCBA Strategic pursuant to
the securityholders' agreement, we will be controlled by RCBA Strategic, which
control will have, among others, the effects indicated below.
. General Voting: Subject to exceptions in the securityholders' agreement,
RCBA Strategic will control the outcome of all votes of holders of our
Class A and Class B common stock, taken together.
. Board: RCBA Strategic will have the right to designate a majority of the
members of our board of directors.
. Change of Control: RCBA Strategic generally will be able to prevent any
transaction that would result in a change of control of us. Subject to
exceptions in the securityholders' agreement, RCBA Strategic also will be
able to cause a change of control. In addition, as a result of the terms
of the subscription agreement required to be executed in connection with
participating in the offerings, if the BLUM Funds and other stockholders
agree to sell common stock equal to at least a majority of our
outstanding Class A common stock and Class B common stock, taken
together, then the BLUM Funds will be able to require you to sell your
Class A common stock to the purchaser as well.
In connection with RCBA Strategic's control of us, the interests of RCBA
Strategic may differ significantly from yours and your ability to sell your
shares of Class A common stock prior to an underwritten initial public offering
of our Class A common stock will be extremely limited pursuant to the terms of
the subscription agreement.
The new credit agreement and the indentures governing our new senior notes and
the 11 1/4% senior subordinated notes will impose significant operating and
financial restrictions on us, and in the event of default, all of these
borrowings would become immediately due and payable.
The indentures for our new senior notes and for BLUM CB Corp.'s 11 1/4%
senior subordinated notes due 2011 will impose, and the terms of any future
debt may impose, operating and other restrictions on us, CB Richard Ellis
Services and many of our subsidiaries. These restrictions will affect, and in
many respects will limit or prohibit the ability of us, CB Richard Ellis
Services and our other restricted subsidiaries after the merger to:
. incur or guarantee additional debt;
. pay dividends or distributions on capital stock;
. repurchase equity interests;
. make investments;
. create restrictions on the payment of dividends or other amounts to us;
. sell or otherwise dispose of assets, including capital stock of
subsidiaries;
. create liens;
. enter into transactions with affiliates; and
. enter into mergers or consolidations.
23
In addition, the new credit agreement will include other and more
restrictive covenants and prohibit us from prepaying most of our other debt
while debt under the credit agreement is outstanding. The new credit agreement
will also require us to maintain compliance with specified financial ratios.
Our ability to comply with these ratios may be affected by events beyond our
control.
The restrictions contained in the indenture and the credit agreement could:
. limit our ability to plan for or react to market conditions or meet
capital needs or otherwise restrict our activities or business plans; and
. adversely affect our ability to finance our operations, strategic
acquisitions, investments or alliances or other capital needs or to
engage in other business activities that would be in our interest.
A breach of any of these restrictive covenants or our inability to comply
with the required financial ratios could result in a default under the new
credit agreement and the indentures governing the senior notes and the 11 1/4%
senior subordinated notes due 2011. If any such default occurs, the lenders
under the credit agreement and the holders of the senior notes and the 11 1/4%
senior subordinated notes, pursuant to the respective indentures may elect to
declare all borrowings outstanding, together with accrued interest and other
fees, to be immediately due and payable. The lenders will also have the right
in these circumstances to terminate any commitments they have to provide
further borrowings. If we are unable to repay outstanding borrowings when due,
the lenders under the credit agreement will also have the right to proceed
against the collateral granted to them to secure the debt, which includes our
available cash. If the debt under the credit agreement, the senior notes, and
the 11 1/4% senior subordinated notes were to be accelerated, we cannot assure
you that our assets would be sufficient to repay in full that debt and our
other debt.
We are a party to numerous lawsuits, including lawsuits related to merger
transactions, which if determined adversely to us, could result in the
imposition of damages against us and could harm our business and financial
condition.
Both BLUM CB Corp. and CB Richard Ellis Services have been subject to
putative class action lawsuits in Delaware and California in connection with
the announcement of the merger transactions. These actions all alleged that
BLUM CB's offering price was unfair and inadequate and sought injunctive relief
or rescission of the merger transactions and, in the alternative, money
damages. Although BLUM CB and CB Richard Ellis Services entered into a
memorandum of understanding with respect to the actions that have been filed in
Delaware that may lead to a settlement, there are numerous conditions to the
settlement and not all of them may be satisfied. In addition, we may be subject
to other lawsuits in connection with the merger transactions that have not yet
been filed. In the event that the current lawsuits with respect to the merger
transactions are not settled or we become subject to additional suits, these
lawsuits could result in the imposition of damages against us or CB Richard
Ellis Services. In the event that damages are awarded, our business and
financial condition could be harmed.
In addition, CB Richard Ellis Services is the defendant in numerous lawsuits
filed in the ordinary course of business. Although it is defending these
claims, CB Richard Ellis Services cannot be certain that these cases will be
resolved in its favor, and its insurance policies may not cover any such
losses. Any losses not covered by insurance could adversely impact our
business.
Risks Related to Our Business
The success of our business is significantly related to general economic
conditions, and accordingly, our business could be harmed by an economic
slowdown or recession.
In the latter part of the first quarter of 2001, the business of CB Richard
Ellis Services was adversely affected by a slowdown in the U.S. economy in
general, and certain local and regional U.S. economies in particular, which
have led to deteriorating commercial real estate market conditions. Its first
quarter results reflected a slowdown in its U.S. sales activities beginning in
February and a slowdown in its U.S. lease activities
24
beginning in March, as well as lower than expected revenues in Europe and Asia
Pacific. This weakness in sales and lease activities has continued into the
second quarter. Operating results for the second quarter ending June 30, 2001
will be considerably below our operating results for the second quarter ending
June 30, 2000.
Periods of economic slowdown or recession in the United States and in other
countries, rising interest rates or declining demand for real estate, or the
public perception that any of these events may occur, can harm many segments of
our business. These economic conditions could result in a general decline in
rents which in turn would reduce revenues from property management fees and
brokerage commissions derived from property sales and leases. In addition,
these conditions could lead to a decline in sale prices as well as a decline in
demand for 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 other segments of our business will also
suffer, due to the relationship among our various business segments. Further,
as a result of our debt level and the terms of the debt instruments we will
enter into in connection with the merger transactions, our vulnerability to
adverse general economic conditions will be heightened.
The sharp downturn in the commercial real estate market beginning in the
late 1980s in the United States caused, and downturns in the future may again
cause, some property owners to dispose of or lose their properties through
foreclosures and has caused many real estate firms to undergo restructuring or
changes in control. Changes in the ownership of properties may be accompanied
by a change in property and investment management firms and could cause us to
lose management agreements or make the agreements we retain less profitable.
We may not be able to implement our cost savings strategy; and even if we are
able to implement it, this strategy may not reduce our operating expenses by as
much as we anticipate and could even compromise our business.
In light of the recent slowdown in the U.S. economy and the decline in the
operating performance of CB Richard Ellis Services, it has announced a major
cost cutting program in May 2001. As part of this plan, it intends to reduce
its work force, reduce the bonuses it pays to managers and reduce other
operating and back office expenses. While it expects to realize between
approximately $35 to $40 million in cost savings during the remainder of 2001,
excluding one-time severance costs, we cannot assure you that we and CB Richard
Ellis Services will be able to implement the plan during 2001 or at all. Even
if we are able to implement the plan, it may yield substantially less savings
than we expect. In fact, the implementation of the plan could adversely affect
our revenue, as it could create inefficiencies in our business operations,
result in labor disruptions and limit our ability to expand and grow our
business.
If the properties that we manage fail to perform, then our financial condition
and results of operations could be harmed.
The revenue we generate from our property management/asset services segment,
and to some extent from our facilities management segment, is generally a
percentage of aggregate rent collections from properties, with many management
agreements providing for a specified minimum management fee. Accordingly, our
success will be dependent in part upon the performance of the properties we
manage and the performance of these properties will depend upon the following
factors, among others, many of which are partially or completely outside of our
control:
. our ability to attract and retain creditworthy tenants;
. the magnitude of defaults by tenants under their respective leases;
. our ability to control operating expenses;
. governmental regulations, local rent control or stabilization ordinances
which are or may be put into effect;
25
. financial conditions prevailing generally and in the areas in which these
properties are located;
. the nature and extent of competitive properties; and
. the real estate market generally.
We have numerous significant competitors, many of which may have greater
financial resources than we do.
We compete across a variety of business disciplines within the commercial
real estate industry, including investment management, tenant representation,
corporate services, construction and development management, property asset
management, agency leasing, valuation and mortgage banking. In general, with
respect to each of our business disciplines, we cannot assure you that we will
be able to continue to compete effectively, maintain our current fee
arrangements or margin levels or not encounter increased competition. Each of
the business disciplines in which we compete is highly competitive on an
international, national, regional or local level. Although we are one of the
largest real estate services firms in the world, our relative competitive
position varies significantly across product and service categories and
geographic areas. Depending on the product or service, we face competition from
other real estate service providers, institutional lenders, insurance
companies, investment banking firms, investment managers and accounting firms.
Many of our competitors are local or regional firms, which are substantially
smaller than us. However, they may be substantially larger on a local or
regional basis. We are also subject to competition from other large national
and multinational firms.
In addition to our historical competitors, the advent of the Internet has
introduced new ways of providing real estate services, as well as new entrants
and competitors in our industry. We cannot currently predict who these
competitors will be, nor can we predict what our response to them will be. Our
response to competitive pressures could require significant capital resources,
changes in our organization or technological changes. If we are not successful
in developing a strategy to address the risks and to capture the related
opportunities presented by technological changes and the emergence of e-
business, our business, financial condition or results of operations could be
harmed.
Our international operations subject us to social, political and economic risks
of doing business in foreign countries.
We conduct a substantial portion of our business, and a substantial number
of our employees are located, outside of the U.S. In the first quarter of 2001,
we generated approximately 23% of our revenue from operations outside the U.S.
The international scope of our operations may lead to volatile financial
results and difficulties in managing our businesses. Circumstances and
developments related to international operations that could negatively affect
our business, financial condition or results of operations include the
following factors:
. difficulties and costs of staffing and managing international operations;
. currency restrictions, such as those in Brazil, India and Malaysia, which
may prevent us from transferring capital and profits to the U.S.;
. changes in regulatory requirements;
. potentially adverse tax consequences;
. the burden of complying with multiple and potentially conflicting laws;
. the impact of regional or country-specific business cycles and economic
instability;
. the geographic, time zone, language and cultural differences between
personnel in different areas of the world;
. greater difficulty in collecting accounts receivable in some geographic
regions such as Asia and Europe;
. political instability; and
. foreign ownership restrictions with respect to operations in countries
such as Indonesia, India and China.
26
We have committed additional resources to expand our worldwide sales and
marketing activities, to globalize our service offerings and products in
selected markets and to develop local sales and support channels. If we are
unable to successfully implement these plans, to maintain adequate long-term
strategies which successfully manage the risks associated with our global
business or to adequately manage operational fluctuations, our business,
financial condition or results of operations could be harmed.
Our revenues and earnings may be adversely affected by foreign currency
fluctuations.
Our revenues from non-U.S. operations have been primarily denominated in the
local currency where the associated revenues were earned. During the first
quarter of 2001, approximately 23% of our business was transacted in currencies
of foreign countries, primarily the British Pound Sterling, the Canadian
Dollar, the French Franc, the Hong Kong Dollar and the Australian Dollar. We
may experience significant negative fluctuations in revenues and earnings
because of corresponding fluctuations in foreign currency exchange rates. For
example, as a result of exchange rate adjustments, our total net income was
reduced by approximately $1.1 million during 2000.
We have made significant acquisitions of non-U.S. companies since the
beginning of 1998, including Hillier Parker May and Rowden, REI, Ltd. and CB
Commercial Real Estate of Canada, Inc. We may acquire additional foreign
companies in the future as well. As we increase our foreign operations,
fluctuations in the value of the U.S. Dollar relative to the other currencies
in which we may generate earnings could have a material adverse effect on our
business, operating results and financial condition. 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. Due to the
constantly changing currency exposures to which we will be subject and the
volatility of currency exchange rates, we cannot assure you that we will not
experience currency losses in the future, nor can we predict the effect of
exchange rate fluctuations upon future operating results.
Our management may decide to use currency hedging instruments, including
foreign currency forward contracts, purchased currency options, where
applicable, and borrowings in foreign currency. Economic risks associated with
these hedging instruments include fluctuations in inflation rates impacting
cash flow relative to paying down debt and changes in the underlying net asset
position. These hedging activities may not be effective.
We have grown significantly during the past five years, which has placed
significant demands on our resources, and we may not be able to effectively
manage this growth or future growth.
We have grown significantly in recent years from total consolidated revenues
of approximately $583 million in 1996 to approximately $1.3 billion in 2000.
This historical growth and any significant future growth will continue to place
demands on our resources. Accordingly, our future success and profitability
will depend, in part, on our ability to enhance our management and operating
systems, manage and adapt to rapid changes in technology, obtain financing for
strategic acquisitions and investments, retain employees due to policy and
procedural changes and retain customers due to our ability to manage change. We
may not be able to successfully manage any significant expansion or obtain
adequate financing on favorable terms to manage our growth.
A significant portion of our operations are concentrated in California, and our
business could be harmed if an economic downturn occurs in the California real
estate market.
During the first quarter of 2001, approximately $57.7 million, or 32.6%, of
our $177.0 million in total sale, lease and corporate service revenue,
including revenue from investment property sales, was generated from
transactions originated in the State of California. As a result of the
geographic concentration in California, a material downturn in the California
commercial real estate market or in the local economies in San Diego, Los
Angeles or Orange County could harm our results of operations.
27
Our results of operations vary significantly among quarters, which makes
comparison of our quarterly results difficult.
Our operating income and earnings have historically been substantially lower
during the first three calendar quarters than in the fourth quarter. The
reasons for the concentration of income and earnings in the fourth quarter
include a general, industry-wide focus on completing transactions by calendar
year end, as well as the constant nature of our non-variable expenses
throughout the year versus the seasonality of our revenues and our policy of
paying bonuses in the first quarter. This has historically resulted in a small
operating loss in the first quarter, a small operating profit or loss in the
second and third quarters and a larger profit in the fourth quarter, excluding
the recognition of investment generated performance fees. As a result, quarter-
to-quarter comparisons may be difficult to interpret.
Our growth has depended significantly upon acquisitions and we have experienced
difficulties integrating these acquired businesses with our business.
A significant component of our growth from 1996 to 1998 was, and part of our
principal strategy for continued growth is, through acquisitions. Our strategic
acquisitions since 1995 have included Hillier Parker May and Rowden, REI, Ltd.,
Koll Real Estate Services, L. J. Melody & Company and Westmark Realty Advisors.
Recent tactical acquisitions have included Cauble and Company, North Coast
Mortgage and Shoptaw-James. We expect to continue our acquisition program. Any
future growth by us through acquisitions will be partially dependent upon the
continued availability of suitable acquisition candidates at favorable prices
and upon advantageous terms and conditions. However, future acquisitions may
not be available at advantageous prices or upon favorable terms and conditions.
In addition, acquisitions involve risks that the businesses acquired will not
perform in accordance with expectations and that business judgments concerning
the value, strengths and weaknesses of businesses acquired or whether the
consequences of any acquisition will prove incorrect.
We have had, and may experience in the future, significant difficulties in
integrating operations acquired from other companies, including the diversion
of our management's attention from other business concerns and the potential
loss of our key employees or those of the acquired operations. For example, in
the Westmark acquisition, serious differences in corporate culture resulted in
the loss of several key employees. In the L. J. Melody acquisition, it took
over a year to blend our loan servicing operations with those of L. J. Melody.
The integration of Koll and our property, facilities and corporate accounting
systems took almost nine months to complete. We believe that most acquisitions
will have an adverse impact on operating income and net income during the first
six months following the acquisition. In addition, during this time period,
there are generally significant one-time costs relating to integrating
information technology, accounting and management services and rationalizing
personnel levels.
We have had particular difficulty integrating the accounting systems of all
the businesses we have acquired. We have numerous different accounting systems
each of which reports results in a different currency. If we are unable to
fully integrate the accounting and other systems of the businesses we own, we
may not be able to effectively manage our acquired businesses. Moreover, the
integration process itself may be disruptive to our business as it requires us
to coordinate geographically diverse organizations and implement new accounting
and information technology systems.
Our co-investment activities subject us to real estate investment risks which
could cause fluctuations in our earnings and cash flow.
An important part of the strategy for our investment management business
involves investing our own capital in real estate investments with our clients.
As of March 31, 2001, we had a total net investment of $66.5 million in co-
investments and had committed an additional $40.6 million to fund future co-
investments. Our participation in real estate transactions through co-
investment activity could increase fluctuations in our earnings and cash flow.
Other risks associated with these activities include:
. loss of our investments;
28
. difficulties associated with international co-investment described in the
risk factors above "Our international operations subject us to social,
political and economic risks of doing business in foreign countries" and
"Our revenues and earnings may be adversely affected by foreign currency
fluctuations"; and
. our potential lack of control over the disposition of any co-investments
and the timing of the recognition of gains, losses or potential incentive
participation fees.
We have invested in a number of non-core, e-commerce businesses and other
Internet-related real estate investments and may never realize a return on
these investments.
We have invested approximately $23.0 million in a number of non-core e-
commerce businesses and other Internet-related real estate investments. These
investments are highly speculative and may never generate any income for us. In
addition, we may lose all the money we have invested in these businesses. For
example in the second quarter, we wrote off our $2.9 million investment in
Eziaz, which has recently declared bankruptcy. Our write-off of our Eziaz
investment, and any other write-offs we may take in the future, will adversely
affect our earnings.
We may incur liabilities related to our subsidiaries being general partners of
numerous general and limited partnerships.
We have subsidiaries which are general partners in numerous general and
limited partnerships that invest in or manage real estate assets in connection
with our co-investments. Any subsidiary that is a general partner is
potentially liable to its partners and for the obligations of its partnership,
including those obligations related to environmental contamination of
properties owned or managed by the partnership. If our exposure as a general
partner is not limited, or if our exposure as a general partner expands in the
future, any resulting losses may harm our business, financial condition or
results of operations. We own our general partnership interests through
special-purpose subsidiaries. We believe this structure will limit our exposure
to the total amount we have invested in and the amount of notes from, or
advances and commitments to, these special-purpose subsidiaries. However, this
limited exposure may be expanded in the future based upon, among other things,
changes in our operating practices, changes in applicable laws or the
application of additional laws to our business.
Our joint venture activities involve unique risks that are often outside of our
control and, if realized, could harm our business.
We have utilized joint ventures for large commercial investments,
initiatives in Internet-related technology and local brokerage partnerships. In
the future, we may acquire interests in additional limited and general
partnerships and other joint ventures formed to own or develop real property or
interests in real property. We have acquired and may acquire minority interests
in joint ventures, and we may also acquire interests as a passive investor
without rights to actively participate in the management of the joint ventures.
Investments in joint ventures involve additional risks, including the
following:
. the other participants may become bankrupt or have economic or other
business interests or goals which are inconsistent with our own; and
. we may not have the right or power to direct the management and policies
of the joint ventures and other participants may take action contrary to
our instructions or requests and against our policies and objectives.
If a joint venture participant acts contrary to our interest, it could harm
our business, results of operations and financial condition.
29
Our success depends upon the retention of our senior management, as well as our
ability to attract and retain other qualified employees.
Our continued success is highly dependent upon the efforts of our executive
officers and key employees. We expect that after the consummation of the merger
transactions, the only members of our senior management that will be parties to
employment agreements with us are Raymond Wirta, our Chief Executive Officer,
and Brett White, our Chairman of the Americas. If either of Messrs. Wirta or
White leaves or his or her services become otherwise unavailable to us, our
business and results of operations may suffer.
In addition, as a decentralized, global commercial real estate services
firm, we rely to a considerable extent on the quality of local management and
the reputation of our employees in the various countries in which we operate.
If we fail to attract and retain key personnel in the foreign countries in
which we operate, particularly in those foreign countries where we have a
limited operating history and brand recognition, our growth may be limited, and
our business and operating results could suffer.
If we fail to comply with laws and regulations applicable to real estate
brokerage and mortgage transactions and other segments of our business, we may
incur significant financial penalties.
Due to the broad geographic scope of our operations and the numerous forms
of real estate services we perform, we are subject to numerous federal, state
and local laws and regulations specific to the services we perform. For
example, our brokerage of real estate sales and leasing transactions requires
us to maintain brokerage licenses in each state in which we operate. If we fail
to maintain our licenses or conduct brokerage activities without a license, we
may be required to pay fines or return commissions received or have our license
suspended. In addition, because the size and scope of real estate sale
transactions has increased significantly during the past several years, both
the difficulty of ensuring compliance with the numerous state licensing regimes
and the possible loss resulting from non-compliance have increased. In the
future, the laws and regulations applicable to our business, both in the U.S.
and in foreign countries, also may change in ways that materially increase our
costs of compliance.
We may have liabilities in connection with real estate brokerage and property
management activities.
As a licensed real estate broker, we and our licensed employees are subject
to statutory due diligence, disclosure and standard-of-care obligations in
connection with brokerage transactions. Failure to fulfill these obligations
could subject us or our employees to litigation from parties who purchased,
sold or leased properties we brokered or managed. We may become subject to
claims by participants in real estate transactions claiming that we did not
fulfill our statutory obligations as a broker.
In addition, in our property management business, we hire and supervise
third party contractors to provide construction and engineering services for
our properties. While our role generally is limited to that of a supervisor, we
may be subjected to claims for construction defects or other similar actions.
Adverse outcomes of property management litigation could negatively impact our
business, financial condition and results of operations.
Risks Related to Participating in Any of the Offerings
Because of the lack of any market for our Class A common stock and the transfer
restrictions that we are imposing, you should only purchase shares of Class A
common stock in the offerings if you are financially able and prepared to hold
these shares of Class A common stock for an indefinite period of time.
There is no public market for our Class A common stock. In connection with
the offerings, each purchaser of our Class A common stock for direct ownership
will be required to sign a subscription agreement, which will include
significant restrictions on transferring our Class A common stock. As a result
of these restrictions,
30
prior to any initial underwritten public offering of our Class A common stock
and the listing of our Class A common stock on a national securities exchange
or the Nasdaq National Market, the holders of our Class A common stock
generally will only be able to transfer their shares to specified family
members, specified estate planning vehicles, affiliates and, if the shares are
not subject to a right of repurchase, other employees of us and our
subsidiaries as well as our other stockholders. In addition, designated
managers will be prohibited from transferring any shares that are subject to
our right of repurchase. During the transfer restriction period described
above, before a participant in the CB Richard Ellis Services 401(k) plan or
deferred compensation plan may receive a distribution of shares of our Class A
common stock, if the participant has not previously signed a subscription
agreement he or she will be required to sign a stockholder's agreement that
contains substantially the same restrictions on transfer as the subscription
agreements. Accordingly, no public market will exist for the sale of the shares
of our Class A common stock after the offerings. We do not intend to apply for
a listing of our shares of Class A common stock on any national securities
exchange or automated quotation system.
We are offering shares of our Class A common stock, which have significantly
less voting power than the shares of our Class B common stock that will be held
by the buying group.
We will be offering shares of our Class A common stock for direct ownership
and ownership through the CB Richard Ellis Services 401(k) plan, options to
acquire shares of our Class A common stock and shares of our Class A common
stock underlying stock fund units in the CB Richard Ellis Services deferred
compensation plan in these offerings. Each share of our Class A common stock
has the right to one vote on all matters submitted to our stockholders. In
connection with the merger transactions, each of the members of the buying
group will receive shares of our Class B common stock, which have the right to
ten votes per share on all matters submitted to our stockholders. In addition,
in the event that any holder of Class B common stock acquires shares of Class A
common stock in the future, whether pursuant to rights set forth in the
subscription agreements or otherwise, the holder of Class B common stock may
elect to convert those shares of Class A common stock into an equal number of
shares of Class B common stock. However, under circumstances set forth in our
certificate of incorporation described in the section of this prospectus titled
"Description of Capital Stock," each of the outstanding shares of Class B
common stock may convert into a share of Class A common stock.
As a result of the disparate voting rights of the Class A common stock and
the Class B common stock, the holders of our Class B common stock, which
generally will only be members of the buying group, will be able to determine
all matters submitted to our stockholders. Accordingly, if you acquire any
shares of Class A common stock as a result of the offerings, you will have
little ability to exercise any control of us through the voting of your shares.
Other than with respect to voting rights, the shares of Class A common stock
and Class B common stock have the same rights.
We may issue additional Class A common stock or Class B common stock in the
future for a price per share less than what you are paying in this offering,
which will result in additional dilution to you.
You may experience dilution in book value per share of Class A common stock
outstanding upon the exercise of options that may be issued from time to time.
In addition, we may increase the number of authorized shares of Class A common
stock or Class B common stock or grant additional options or other equity
interests that will have the effect of diluting your equity interests.
We have no current intention to pay dividends on our Class A common stock or
Class B common stock.
We have no current intention to pay dividends on our Class A common stock or
Class B common stock at any time in the foreseeable future. We are a holding
company that is dependent upon distributions from its subsidiaries to meet its
cash requirements. In addition, the credit agreement and the indentures for the
senior notes and the 11 1/4% senior subordinated notes contain restrictions on
our ability to declare and pay dividends on our capital stock.
31
Holders of a majority of our Class A common stock and Class B common stock,
taken together, will be able to require you to sell your shares of Class A
common stock upon the same terms and conditions that they receive.
Pursuant to the subscription agreements, if stockholders decide to sell
shares of our Class A common stock and Class B common stock equal to at least a
majority of the outstanding shares of our Class A common stock and Class B
common stock, taken together, then they may require you to sell your shares
generally upon the same terms and conditions. These terms and conditions may
include, among other things, making representations and warranties regarding
your ownership of these shares, agreeing to indemnify the purchaser for
breaches of representations, warranties and covenants that you are required to
make in the sale agreement and placing a portion of the consideration received
for your shares in escrow to satisfy any potential obligations owed to the
purchaser of the shares. However, in the event that the purchaser requires the
sale to be structured as a recapitalization, then the form of consideration
paid to the majority selling stockholders may differ from the form paid to the
employees. The requirement to sell your shares at the request of our majority
stockholders will apply even if you do not want to sell your shares at that
time and upon the terms and conditions negotiated by our majority stockholders.
For additional information regarding our stockholders' ability to require you
to sell your shares, see the section of this prospectus titled "Description of
the Offering Documents--Subscription Agreements--Required Sale."
Your participation in the offerings could result in unfavorable tax treatment
of cash that you receive in the merger in exchange for shares of CB Richard
Ellis Services common stock that you own directly.
If you participate in the offerings, any cash consideration that you receive
in the merger in exchange for shares of CB Richard Ellis Services common stock
that you own directly may be treated as a dividend taxable as ordinary income,
without regard to your gain or loss, unless you satisfy one of three tests for
capital gain or loss treatment. These tests, which are described more fully
under "U.S. Federal Tax Consequences," are complex and require an analysis of
your actual and constructive ownership of CB Richard Ellis Services before and
after the merger and the offerings. In addition, we have attempted to structure
the offerings so that, by irrevocably assigning your right to receive the cash
proceeds that you would have received in the merger as payment to us for your
Class A common stock, you can claim that you exchanged shares of CB Richard
Ellis Services common stock for our Class A common stock in a tax-free
exchange. There can be no assurance that the Internal Revenue Service will
agree with that characterization. For more information about the U.S. federal
income tax consequences of the merger and the offerings, see the section of
this prospectus entitled "U.S. Federal Tax Consequences."
Designated managers will be required to make a Section 83(b) election under the
federal income tax laws with respect to any shares subject to repurchase, and
this election may not always be beneficial with respect to these taxes.
Pursuant to the subscription agreement, designated managers will be required
to make a Section 83(b) election under the Internal Revenue Code of 1986 with
respect to shares subject to repurchase. This means that a designated manager
will have ordinary taxable income equal to the excess, if any, of the fair
market value of the shares subject to repurchase over the amount the designated
manager paid for those shares. However, we believe that the purchase price of
those shares will be equal to their fair market value and, accordingly that the
election will not result in any taxable income to the designated managers. If,
however, such shares were determined to have a higher value than the purchase
price, a designated manager would have taxable ordinary income and would not be
entitled to claim any tax loss in that amount with respect to any shares
subject to repurchase that are subsequently forfeited upon the termination of a
designated manager's employment.
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Risks Related to the Deferred Compensation Plan Offering
Participants in the CB Richard Ellis Services deferred compensation plan will
be subject to taxation at ordinary income rates on the fair market value of our
Class A common stock at the time that common stock is distributed to them and
may need separate financial resources to pay these taxes.
Participants in the offering of shares underlying stock fund units in the CB
Richard Ellis Services deferred compensation plan will be subject to taxation
at ordinary income rates and we will be required to withhold these taxes,
including federal taxes, at the time they have elected to receive distributions
of our Class A common stock or other payments from their account balance under
the plan. However, participants under the plan are permitted to delay the time
that they will receive their distributions under specified circumstances.
Participants will also owe Federal Insurance Contributions Act taxes and
Medicare taxes as their deferred compensation vests.
For federal income tax purposes, the ordinary income that is attributable to
shares of our Class A common stock will equal the fair market value of such
shares at the time of their distribution, determined without taking into
account the transfer restrictions applicable to our Class A common stock.
Because there may be little or no ability to sell the shares of Class A common
stock that are distributed from the deferred compensation plan, the funds
needed to pay the taxes on the Class A common stock distribution will need to
be obtained from the participant's other financial resources.
Account balances invested in stock fund units may not be transferred into other
investment funds under the CB Richard Ellis Services deferred compensation
plan.
Account balances invested in stock fund units may not be transferred into
other investment funds under the CB Richard Ellis Services deferred
compensation plan. As a result, a participant in the plan that holds stock fund
units will not have any ability to dispose of his or her investment in such
stock fund units or the Class A common stock underlying such units until a
distribution event under the plan has occurred and the underlying shares of
Class A common stock are distributed to the participant. In addition, prior to
the earlier of the tenth anniversary of the merger or the completion of an
initial public offering following which our Class A common stock is listed on a
national securities exchange or the Nasdaq National Market, any shares of Class
A common stock distributed to a participant under the plan will be subject to
significant transfer restrictions described in this prospectus.
Risk Related to the 401(k) Plan Offering
If you purchase shares of our Class A common stock that will be held in the CB
Richard Ellis Services 401(k) plan, you will be unable to change this
investment to another investment alternative under the plan.
Prior to the merger, participants that hold shares of CB Richard Ellis
Services common stock in their CB Richard Ellis Services 401(k) plan accounts
can sell these shares and invest the proceeds in other investment alternatives
under the plan. After the merger, anyone who purchases shares of our Class A
common stock to be held in the 401(k) plan in the offerings generally will not
be able to sell these shares and invest the proceeds in other investments under
the plan. Participants should also take into account that an investment in our
Class A common stock through the CBRE Holding Common Stock Fund may limit the
participant's ability to receive loans or hardship withdrawals from the plan,
since assets held in the CBRE Holding Common Stock Fund may not be used for
loans or hardship withdrawals.
33
Risk Related to Designated Managers Who Sign a Full-Recourse Note
You generally will be personally liable for the full amount of the note even if
the shares of Class A common stock securing the note decrease in value and
become worth less than the amount owed on the note.
If a designated manager uses a full-recourse note for a portion of his or
her purchase price for shares of Class A common stock to be owned directly, the
note will be secured by a pledge of shares of our Class A common stock directly
owned by the designated manager having an aggregate offering price equal to
200% of the amount of the note. The pledge agreement will provide that, in the
event that the designated manager fails to repay the note, we or the bank
lender under the note, as applicable, will be able to sell these pledged shares
to satisfy this liability. If the value of the pledged shares securing the note
decreases after the offering, then the proceeds from the sale of the pledged
shares may be less than the remaining outstanding balance of the note. As a
result, unless the designated manager has died or become disabled, the unpaid
portion of the note will remain outstanding as a personal obligation of the
designated manager. Under these circumstances, a designated manager would lose
more than the cash that he or she originally invested in the pledged shares.
34
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. The words "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "plan," "predict,"
"project," "will" and similar terms and phrases are used in this prospectus to
identify forward-looking statements. Forward-looking statements included in
this prospectus include, but are not limited to, statements under the headings
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" regarding our
future financial condition, prospects, developments and business strategies.
These statements relate to analyses and other information which are based on
forecasts of future results and estimates of amounts not yet determinable.
These statements also relate to our future prospects, developments and business
strategies.
These forward-looking statements are made based on our management's
expectations and beliefs concerning future events affecting us and are subject
to uncertainties and factors relating to our operations and business
environment, all of which are difficult to predict and many of which are beyond
our control, that could cause our actual results to differ materially from
those expressed in or implied by these forward-looking statements.
The following factors are among those that may cause actual results to
differ materially from the forward-looking statements:
. changes in general economic and business conditions;
. the failure of properties managed by us to perform as anticipated;
. competition;
. changes in social, political and economic conditions in the countries in
which we operate;
. foreign currency fluctuations;
. our ability to manage our growth and integrate our decentralized
businesses;
. our ability to reduce operating expenses;
. an economic downturn in real estate markets across the world,
particularly in California;
. acquisitions;
. our co-investment activities;
. our joint venture activities;
. our investments in e-commerce initiatives;
. our ability to retain senior management and other qualified and
experienced employees in the many countries in which we operate;
. our ability to comply with the laws and regulations applicable to real
estate brokerage and mortgage transactions; and
. significant litigation.
All of the forward-looking statements should be considered in light of these
factors. We do not undertake any obligation to update the forward-looking
statements or risk factors contained in this offering circular to reflect new
information, future events or otherwise, except as required by law.
35
QUESTIONS AND ANSWERS
The following questions and answers briefly address some commonly asked
questions about the offerings. They may not include all of the information that
is important to you. We urge you to read carefully this entire prospectus.
Q: Why is CBRE Holding making the offerings?
A: We are making the offerings in order to give the employees and selected
independent contractors of CB Richard Ellis Services and its subsidiaries
the opportunity to own equity in us after the merger. We believe that
equity ownership by these employees and independent contractors will
provide them with an ability to participate in any future growth in our
equity value and, as a result of their proprietary interest, motivate and
incentivize them to exert their best efforts on our behalf.
Q: Does CBRE Holding need to sell a particular number of shares of its Class A
common stock in the offerings in order to complete the merger transactions?
A: No. Although we will use the proceeds received from the offerings to help
fund the merger transactions, including the merger, we do not need the
proceeds of the offerings to consummate the merger transactions. In the
event that less than all of the shares of Class A common stock and stock
fund units that are being made available in the offerings are purchased,
the BLUM Funds will purchase a number of shares of Class B common stock
equal to the number of shares of Class A common stock and stock fund units
that are not purchased in the offerings. For additional information
regarding the contribution and voting agreement, you should read the
section of this prospectus titled "The Merger Transactions--Contribution
and Voting Agreement."
Q: Which of the offerings can I participate in?
A: The qualifications for participation in each of the offerings are the
following:
. Offering of shares for direct ownership and grants of options: All
of (1) the designated managers, (2) our directors after the merger,
(3) our U.S. employees other than designated managers and (4) our
independent contractors in the states of California, New York,
Illinois and Washington may participate in the offering of shares
for direct ownership. If a designated manager purchases a specified
amount of shares in the offering of shares for direct ownership, the
designated manager will be eligible to receive a grant of stock
options.
. Offering of shares held in 401(k) plan: All of our U.S. employees
who are currently participants in the CB Richard Ellis Services
401(k) plan may participate in this offering.
. Offering of shares underlying stock fund units: All of (1) our U.S.
employees and (2) our independent contractors in the states of
California, New York, Illinois and Washington, in each case at the
time of the merger, who have stock fund units in the CB Richard
Ellis Services deferred compensation plan that have vested prior to
the merger may participate in this offering. In addition, designated
managers will also have the right to transfer into stock fund units
an aggregate of up to $2.6 million of deferred compensation plan
account balances that are currently allocated to the insurance fund
under the deferred compensation plan.
Q: If I am a designated manager, could the limitation on participation in the
offering of shares for direct ownership prevent me from purchasing enough
shares to be eligible to receive stock options?
A: No. Even if the total subscriptions for participants in the offering of
shares for direct ownership exceeds the aggregate number of shares being
made available in that offering, we will ensure that each designated
manager is allowed to purchase enough shares to satisfy the eligibility
requirements for receiving stock options.
36
Q: How were the purchase price for the Class A common stock and the exercise
price for the options to acquire Class A common stock determined?
A: The purchase price of $16.00 per share for the shares of our Class A common
and the exercise price of $16.00 for the options to acquire our Class A
common stock are the same as the cash price that will be paid by the BLUM
Funds to purchase shares of our Class B common stock pursuant to the
contribution and voting agreement. The offering price of $16.00 per share
is also the same price that is being paid in the merger to the CB Richard
Ellis Services stockholders, other than the members of the buying group,
for each share of CB Richard Ellis Services common stock that they own.
Q: Are there any risks associated with investing in the offerings that I
should consider?
A: Yes. There are numerous and significant risks associated with investing in
any of the offerings. You should read each of the risk factors in the
section of this prospectus titled "Risk Factors" before you decide to
invest in any of the offerings. As a result of these risks, you could lose
all or part of the money that you pay to buy shares of our Class A common
stock in the offerings.
Q: How does an investment in Class A common stock differ from an existing
investment in CB Richard Ellis Services common stock?
A: Our business after the merger will be substantially the same as CB Richard
Ellis Services' business before the merger. However, as a result of the
merger transactions, we will have substantially more indebtedness than
CB Richard Ellis Services currently has. In addition, because our Class A
common stock, unlike CB Richard Ellis Services common stock, will not be
publicly traded or listed on a national stock exchange and because you will
be required to sign a subscription agreement significantly restricting your
ability to transfer shares of our common stock you own directly, it will be
much more difficult to sell shares of our Class A common stock than it is
for you to currently sell shares of CB Richard Ellis Services common stock.
Also, if you purchase shares of our Class A common stock to be held in the
CB Richard Ellis Services 401(k) plan, you will generally not be able to
sell those shares prior to becoming eligible for a distribution under the
plan, unlike shares of CB Richard Ellis Services common stock currently
held in the plan, which generally may be sold by plan participants at any
time. Each share of our Class A common stock also will have proportionately
lower voting rights than each share of CB Richard Ellis Services common
stock because each share of Class A common stock will have one vote and
each share of Class B common stock, which shares will be held only by the
members of the buying group, will have ten votes. For additional
information about the amounts and terms of the indebtedness that we will
incur in connection with the merger transactions, you should read the
sections of this prospectus titled "Capitalization" and "Description of
Indebtedness." If you would like to know more about the restrictions on
your ability to transfer shares of our Class A common stock, you should
read the sections of this prospectus titled "Description of the Offering
Documents--Subscription Agreements" and "Description of the Plans--CB
Richard Ellis Services 401(k) Plan." If you would like to know more about
the voting and other rights applicable to our Class A common stock and our
Class B common stock, you should read the section of this prospectus titled
"Description of Capital Stock."
Q: If I want to subscribe in the offerings, what should I do?
A: During the week of July 8, 2001, we will distribute the preliminary
prospectus and related subscription documents to our employees and
independent contractors who are eligible to participate in these offerings.
If you decide that you want to participate in one or more of the offerings,
you will be required to complete and return to us the appropriate
subscription materials expressing your non-binding indication of interest
no later than July 13, 2001. Upon effectiveness of the registration
statement relating to the offerings, you will receive a final prospectus
relating to the offerings and you must then respond within 48 hours either
confirming or denying your interest in purchasing shares. The subscription
materials will indicate how and when you should deliver payment for any of
our securities that you decide to acquire in the offerings. If you would
like to know more about the offering process, you should read the section
of this prospectus titled "The Offerings."
37
Q: When will the offerings be completed?
A: We expect to complete the offerings substantially simultaneously with the
closing of the merger agreement. We currently expect to close the merger
agreement on July 20, 2001.
Q: What if the merger agreement is terminated, abandoned or does not close for
some other reason?
A: The offerings will not be completed if the merger agreement is terminated,
abandoned or does not close for some other reason. If you have delivered
any subscription materials or payment to us before the termination or
abandonment of the merger agreement, we will promptly return the materials
or payment to you. You should read the section of this prospectus titled
"The Merger Transactions--Merger Agreement" if you would like to know more
about the conditions to the closing of the merger agreement.
Q: What type of information will be available about CBRE Holding and CB
Richard Ellis Services after the closing of the merger agreement and the
offerings?
A: After the closing of the merger transactions and the offerings, we expect
to be subject to both the reporting requirements and the proxy rules of the
Securities Exchange Act of 1934. These requirements mean that we will file
the same type of periodic and other reports and proxy statements that CB
Richard Ellis Services currently files, including annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and a
proxy statement for each of our stockholder meetings. In addition, our
stockholders that beneficially own 5% or more of our common stock, such as
the BLUM Funds and Freeman Spogli, will be required to file, and amend as
warranted, a Schedule 13D or Schedule 13G and our directors, officers and
stockholders that beneficially own 10% or more of our common stock will be
subject to the "short-swing" trading rules under Section 16 of the
Securities Exchange Act. In the future, if we no longer have at least 300
holders of record of our common stock, we may decide to deregister our
common stock under the Securities Exchange Act. In that case we would no
longer need to file proxy statements and our stockholders, directors and
officers would not need to file Schedule 13Ds or Schedule 13Gs and would no
longer be subject to Section 16. However, even if we deregister our common
stock, we would be required under the indenture governing our senior notes
to continue to provide the other reports indicated above for as long as the
senior notes remain outstanding and CB Richard Ellis Services would be
required under the indenture governing the 11 1/4% senior subordinated
notes to continue to provide the other reports indicated above for as long
as the senior subordinated notes remain outstanding. After the closing of
the merger transactions and the offerings, the common stock of CB Richard
Ellis Services is expected to be deregistered under the Securities Exchange
Act of 1934 and will be delisted from the New York Stock Exchange. As a
result, although CB Richard Ellis Services will continue to file periodic
reports, it will cease to file proxy statements and its directors, officers
and stockholders will cease making filings under Section 13 or 16 of the
Securities Exchange Act.
Q: Does CBRE Holding have any current intentions to apply for a listing of the
shares of its common stock on a national securities exchange or the Nasdaq
National Market?
A: No. Although an underwritten public offering of shares of our common stock
and a listing of these shares may occur in the future, we do not have any
current intention to do so and these events may never happen.
Q: Will I be able to transfer my shares to whomever I want?
A: No. Prior to the earlier of ten years from the closing of the merger
transactions or 180 days after an underwritten initial public offering of
our common stock that results in the listing of our common stock on a
national stock exchange or the Nasdaq National Market, you generally will
only be able to transfer your shares to the following types of persons:
. specified members of your family or a person acting as a fiduciary
on their behalf;
. trusts or other entities, all of the beneficial interests of which
are held by you or one or more of the persons indicated in the prior
bullet point;
38
. us;
. RCBA Strategic or its affiliates;
. Freeman Spogli or their affiliates; or
. except for shares held by our designated managers that remain
subject to a right of repurchase, any of our employees who have
signed a subscription agreement or generally agree to become subject
to the terms of your subscription agreement.
In addition, if you are a designated manager and you sell shares of our
common stock that are subject to a pledge agreement securing a full-
recourse note delivered to us in connection with the offerings, you will be
required to use the after-tax proceeds from this sale to repay all or, if
the after-tax proceeds are less than the outstanding balance of the note, a
portion of the outstanding balance of the note.
If you purchase shares to be held in our 401(k) plan in the offerings, the
terms of this plan generally will prevent you from selling those shares
prior to the time you are eligible to receive a distribution under the
plan. In addition, prior to receiving a distribution under the 401(k) plan,
if you have not previously signed a subscription agreement you will be
required to sign a stockholder's agreement that has restrictions on
transfer identical to those included in the subscription agreements. If you
elect to continue to hold stock fund units in the deferred compensation
plan, prior to receiving shares of our Class A common stock upon a
distribution under this plan, if you have not previously signed a
subscription agreement you generally will be required to sign a
stockholder's agreement that has restrictions on transfer identical to
those included in the subscription agreements.
For additional information about the transfer restrictions in the
subscription agreements and under our 401(k) plan, you should read the
sections of this prospectus titled "Description of the Offering Documents--
Subscription Agreements" and "Description of the Plans--CB Richard Ellis
Services 401(k) Plan."
Q: What happens to my shares of Class A common stock if holders of at least a
majority of the shares of CBRE Holding Class A and Class B common stock
decide to sell their shares?
A: These holders may be able to require you to sell the same proportion of the
outstanding shares of our Class A common stock that you own as the Class A
and Class B common stock they sell to the proposed purchaser. If these
holders do not, or are not able to, exercise the "required sale" right
described in the prior sentence, as long as the purchaser is not an
affiliate of RCBA Strategic, you will be able to sell, if you so desire,
the same proportion of the outstanding shares of our Class A common stock
that you own as the Class A and Class B common stock these holders sell to
the proposed purchaser. With respect to both the "co-sale" right described
in the immediately preceding sentence and the "required sale" right, you
generally will be entitled to receive the same amount and type of
consideration per share as the majority selling stockholders. However, in
the sale, you will also be required to provide the same representations,
warranties, covenants and indemnities as the majority holders. For
additional information about the "required sale" right and the "co-sale"
right, you should read the sections of this prospectus titled "Description
of the Offering Documents--Subscription Agreements--Co-Sale" and "--
Required Sale Right."
Q: Does CBRE Holding have a right to repurchase any of the shares that I
purchase in the offerings?
A: Only designated managers that purchase shares for direct ownership will
have a portion of their shares subject to a right of repurchase. The amount
of shares initially subject to repurchase will be the minimum number of
shares required for the designated manager to receive a grant of options.
However, if the number of shares actually purchased by the designated
manager for direct ownership is less than that amount, then all of the
shares purchased for direct ownership by the designated manager will be
subject to repurchase. This right to repurchase generally will lapse with
respect to 20% of the shares initially subject to repurchase on each of the
first five anniversaries of the closing of the merger. If the designated
39
manager's employment by us ends, then any remaining shares subject to
repurchase on that date will continue to remain subject to repurchase at all
times after that date.
Q: What will happen to my account balance in the deferred compensation plan if
CB Richard Ellis Services files for bankruptcy or becomes insolvent?
A: To the extent your account balance is invested in any alternative under the
plan other than stock fund units, you will become a general unsecured
creditor of CB Richard Ellis Services for the value of your account. As an
unsecured creditor of CB Richard Ellis Services, you will be subordinate to
any claims by the secured creditors of CB Richard Ellis Services against
its assets, including the lenders under the senior secured credit
facilities of CB Richard Ellis Services, which lenders will have liens on
substantially all of its assets after the merger. In the event that any of
its assets remain after the claims of its secured creditors have been
satisfied in full, then you would share in the distribution of these
remaining assets with all of its other general unsecured creditors. To the
extent your account balance is invested in stock fund units in the plan,
you would not receive any of the assets of CB Richard Ellis Services in the
event of the bankruptcy or insolvency of us or CB Richard Ellis Services.
For additional information regarding the deferred compensation plan, you
should read the section of this prospectus titled "Description of the
Plans--CB Richard Ellis Services Deferred Compensation Plan," and for
additional information regarding the senior secured credit facilities of
CB Richard Ellis Services after the merger, you should read the section of
this prospectus titled "Description of Indebtedness--CB Richard Ellis
Services Senior Secured Credit Facilities."
Q: What if I have additional questions regarding the offerings?
A: As we indicated above, we will be holding meetings at CB Richard Ellis
Services' offices in a number of cities in the United States and subject to
securities law restrictions, we will attempt to answer all questions that
you may have regarding the offerings. In addition, if you have questions
regarding the merger, you should refer to the proxy statement that has been
filed by CB Richard Ellis Services with the SEC or contact the following:
CB Richard Ellis Services, Inc.
200 North Sepulveda Boulevard, Suite 300
El Segundo, California 94025
Telephone Number: (310) 563-8600
40
THE OFFERINGS
Generally
We are offering up to 3,236,639 shares of our Class A common stock,
including shares to be owned directly, shares to be held in the CB Richard
Ellis Services 401(k) plan and shares underlying stock fund units in the CB
Richard Ellis Services deferred compensation plan. In addition, in connection
with the offering of shares to the designated managers, we also will grant an
aggregate of up to 1,820,397 options to acquire shares of our Class A common
stock to eligible designated managers. Except for designated managers in the
countries of the United Kingdom, Canada and Australia, the offerings are only
being made to our U.S. employees and our independent contractors in the states
of California, New York, Illinois and Washington who continue to work for us
through the completion of the merger. Except for the designated managers
described in the preceding sentence, the offerings are not being made to any of
our employees outside the United States.
Reasons for the Offerings. We are making these offerings to allow these
employees and independent contractors to have an equity stake in our company
after the closing of the merger. We believe that allowing these employees and
independent contractors to participate in the offerings will provide the
following benefits for us and the employees and independent contractors:
. provide an incentive for them to continue improving the operating
performance of CB Richard Ellis Services and its subsidiaries; and
. assist us in retaining employees and independent contractors.
Purchase Price and Exercise Prices. The purchase price for the shares of our
Class A common stock that we are offering will be $16.00 per share. This price
is the same as the price being paid to the CB Richard Ellis Services
stockholders for each of their shares of CB Richard Ellis Services common stock
in connection with the merger and is the same price per share being paid by the
BLUM Funds for the shares of our Class B common stock they purchase for cash
under the contribution and voting agreement. The exercise price for each of the
options to acquire our Class A common stock that we will grant in connection
with the offering of shares to our designated managers will be $16.00 per share
of Class A common stock underlying those options.
Payment of the Purchase Price and the Exercise Prices. The purchase price
for each of the shares purchased in the offerings will be payable in full upon
the closing of the merger agreement. The exercise price for each of the shares
underlying stock options that is granted to our designated managers in the
offerings will be payable, upon exercise of the option by the designated
manager, at any time after the applicable stock options have become vested and
exercisable until the applicable termination date of the stock options. For
additional information regarding the terms of payment of the purchase price and
exercise prices, you should read the sections below titled "Subscription
Documents" and the section of this prospectus titled "Description of Offering
Documents."
Conditions to the Offerings. Each of the offerings being made pursuant to
this prospectus is conditioned upon the prior or simultaneous completion of the
merger. One of the conditions to the completion of the merger is that the
registration statement of which this prospectus forms a part has been declared
effective by the Securities and Exchange Commission. We have filed the
registration statement, but it has not yet been declared effective by the SEC.
The completion of the merger, however, is not conditioned upon the sale of any
shares pursuant to the offerings. For additional information regarding the
conditions to the completion of the merger, you should read the section of this
prospectus titled "The Merger Transactions--Merger Agreement."
41
Deadline for Subscriptions. If you would like to participate in any of the
offerings that are being made available to you, you must return to us the
signed and completed subscription documents described below that are applicable
to the offerings in which you would like to participate no later than 5:00 p.m.
PST on July 13, 2001.
Subscription Documents
We will provide our U.S. and selected non-U.S. employees and our independent
contractors in the states noted above with copies of each of the following
subscription documents that are applicable to them. Each of the following
subscription documents are described in greater detail in the section of this
prospectus titled "Description of the Offering Documents" and are included as
exhibits to the registration statement.
Our "designated managers" are our employees who on April 1, 2001 were
designated by our board of directors as designated managers and on April 24,
2001 were notified by us of their designation and who are employed by us as of
the closing of the merger agreement. Our board of directors made its selection
of the designated managers in consultation with the Chief Executive Officer and
Chairman of the Americas of CB Richard Ellis Services based on the board of
directors' and such officers' subjective determination as to which of our
managers had the potential to have the greatest individual impact on our future
growth and profitability. Our "non-management employees" are all of our U.S.
employees, other than the designated managers, and all of our independent
contractors in the states of California, New York, Illinois and Washington, who
are employed or retained by us as of the closing of the merger agreement.
Subscription Agreements. If you are a designated manager or a non-management
employee and would like to participate in offerings of shares for direct
ownership described below, you will be required to execute and deliver a copy
of the subscription agreement to us by the subscription deadline, which
agreement is described in the section of this prospectus titled "Description of
the Offering Documents--Subscription Agreements." The subscription agreement
that will be made available to our designated managers will contain additional
terms as a result of shares subject to repurchase and the full-recourse note
they may be entitled to use in connection with the offering of shares for
direct ownership. If you are married, your spouse will be required to agree to
the terms of the subscription agreement by signing and delivering to us by the
subscription deadline the Consent of Spouse page that is part of the
subscription agreement.
Full-Recourse Note and Pledge Agreement. If you are a designated manager,
you may be able to pay a portion of the purchase price for the shares of Class
A common stock that you purchase in the offering of shares for direct ownership
using a full-recourse note. A full-recourse note is one in which all of the
assets of the borrower, not just the stock being purchased with the note, are
available to repay the note. The loan represented by the full-recourse note
will be made to you by us or, if we determine, by a bank. If the loan is made
by a bank we will guarantee to the bank the performance by you of your
obligations under the note. Unless our board of directors determines otherwise,
in order to use a full-recourse note in the offering of shares for direct
ownership, a designated manager must subscribe for the minimum number of shares
required for such designated manager to receive a grant of options as
designated by our board of directors. If the designated manager pays a portion
of the purchase price for shares using a full-recourse note, the designated
manager must pledge as security for the note a number of shares of our Class A
common stock having an offering price equal to 200% of the principal amount of
the note. These pledged shares will be held to secure the repayment of the
note. The pledge agreement will provide that, in the event the designated
manager fails to repay this debt, we or the bank lender, as applicable, can
sell his or her pledged shares to satisfy this liability.
If you are a designated manager and decide to use this payment option for
the offering of shares for direct ownership, you will need to sign and deliver
to us by the subscription deadline a copy of the full-recourse note and a copy
of the pledge agreement. The terms of the full-recourse note is described in
the section of this prospectus titled "Description of the Offering Documents--
Full-Recourse Note," and the pledge agreement is described in the section of
this prospectus titled "Description of the Offering Documents--Pledge
Agreement." If you are married, your spouse will be required to agree to the
terms of the pledge agreement by signing and delivering to us by the
subscription deadline the Consent of Spouse page that is a part of the pledge
agreement.
42
Section 83(b) Election Form. If you are a designated manager, you will be
required to make a Section 83(b) election under the Internal Revenue Code of
1986 with respect to shares subject to repurchase. You will be required to sign
and deliver to us by the subscription deadline a copy of the Section 83(b)
Election Form contained in the subscription agreement.
Option Agreement. If you are a designated manager eligible to receive a
grant of stock options in connection with the offering of shares for direct
ownership and would like to receive this grant, you will be required to execute
and deliver to us a copy of the option agreement, which is described in the
section of this prospectus titled "Description of the Offering Documents--
Option Agreement."
401(k) Plan Instructions Form. If you are one of our U.S. employees
currently participating in the CB Richard Ellis Services 401(k) plan and you
would like to participate in the offering of shares of our Class A common stock
to be held in the CB Richard Ellis Services 401(k) plan as described below, you
will be required to execute and deliver to a representative of U.S. Trust
Company, which will be the trustee for the stock fund under the 401(k) plan
after the merger, a form of CB Richard Ellis Services 401(k) Plan Instructions
to Trustee prior to the subscription deadline. If you have any questions
regarding the 401(k) plan instructions to trustee form, you should contact U.S.
Trust at the following phone number: (800) 535-3093.
Deferred Compensation Plan Election Form. If you are one of our U.S.
employees or our independent contractors in the states of California, New York,
Illinois and Washington that holds stock fund units in the CB Richard Ellis
Services deferred compensation plan that have vested prior to the merger, your
vested stock fund units will remain in the deferred compensation plan after the
merger and each stock fund unit will represent the right to receive one share
of our Class A common stock, unless you affirmatively elect to convert the
value of these stock fund units, based upon a value of $16.00 per stock fund
unit, into another investment alternative available under the deferred
compensation plan. If you do not want to continue to hold the vested stock fund
units and would like to convert the value of your vested stock fund units into
another investment alternative, then you will be required to execute and
deliver to us by the subscription deadline a specific form related to the CB
Richard Ellis Services Deferred Compensation Plan, which form is described in
the section of this prospectus titled "Description of the Offering Documents--
DCP Election Form." In addition, if you are a designated manager and you decide
to transfer into stock fund units a portion of your deferred compensation plan
account balance that is currently allocated to the insurance fund under the
deferred compensation plan, you will be required to execute and deliver to us
by the subscription deadline a specific form related to the CB Richard Ellis
Services Deferred Compensation Plan.
Descriptions of the Offerings
Offering of Shares for Direct Ownership
We are offering up to an aggregate of 1,187,982 shares of our Class A common
stock to the designated managers and the non-management employees for direct
ownership at an offering price of $16.00 per share. The number of shares being
made available in this offering assumes that both the offering of shares to be
held in the CB Richard Ellis Services 401(k) plan and the offering of shares
underlying stock fund units in the CB Richard Ellis Services deferred
compensation plan are fully subscribed for. To the extent shares are not
subscribed for in those other offerings, we will make an equivalent number of
additional shares available in the offering of shares for direct ownership.
Assignment of Proceeds From the Merger. In connection with the payment of
the purchase price for the shares being offered for direct ownership, each
designated manager and non-management employee will have the option to
irrevocably assign to us the right to receive the net cash proceeds that they
would otherwise be entitled to receive, if any, in the merger for each of the
following:
. shares of CB Richard Ellis Services common stock owned by the designated
manager or non-management employee at the time of the merger, other than
those shares owned through the CB Richard Ellis Services 401(k) plan; and
. options held by the designated manager or non-management employee to
acquire shares of CB Richard Ellis Services common stock.
43
These assigned proceeds would constitute payment for all or a portion of the
shares of our Class A common stock that the designated manager or non-
management employee decides to acquire for direct ownership.
Over-Subscription. In the event that this offering of shares is over-
subscribed , meaning we receive offers to purchase more than the 1,187,982
shares we have set aside for this offering, we first will allocate a sufficient
number of shares to the designated managers to allow them to subscribe for the
minimum number of shares necessary to obtain grants of options, as described
below, and all remaining shares then will be allocated proportionately among
all participants in the offering of shares for direct ownership based upon the
total number of those shares for which we receive subscriptions.
Grants of Stock Options to Designated Managers. In connection with the
offering of shares for direct ownership, the designated managers will be
eligible to receive an aggregate of up to 1,820,397 options to acquire our
Class A common stock. Unless our board of directors determines otherwise, a
designated manager will receive a grant of a portion of these options only if
he or she subscribes for a minimum number of shares in the offering of Class A
common stock for direct ownership. The minimum number of shares that a
designated manager must subscribe for in order to receive an option grant is a
percentage of 625,000 shares that will be allocated to that designated manager
by our board of directors. The minimum number of shares that a designated
manager must subscribe for in order to receive a grant of options will be
reduced by the number of CB Richard Ellis Services deferred compensation plan
stock fund units acquired by the designated manager at the closing of the
offerings by the transfer of account balances currently allocated to the
deferred compensation plan insurance fund. For additional information about the
CB Richard Ellis Services deferred compensation plan, you should read the
section of this prospectus titled "Description of the Plans--CB Richard Ellis
Services Deferred Compensation Plan."
If a designated manager subscribes for at least his or her minimum number of
shares, then we will grant to the designated manager a percentage of the
1,820,397 total options equal to the percentage of the 625,000 shares allocated
to that designated manager. Subject to our right to allocate the shares to be
purchased if the offering is over-subscribed, a designated manager may
subscribe for more than the minimum number of shares required to receive a
grant of options. However, as long as the minimum number of shares required to
receive an option grant are subscribed for, the number of options granted to
the designated manager will be the same regardless of the actual number of
shares subscribed for.
For example, if the percentage of 625,000 shares that a designated manager
must subscribe for in order to receive options is 1%, and the designated
manager subscribes for at least 6,250 shares in the offering for direct
ownership, he or she will be granted 18,204 options, representing 1% of the
aggregate options available for grant to all designated managers. This will be
true even if the designated manager subscribes for more than 6,250 shares.
At the time that the merger and the offerings are completed, the 1,820,397
total options available for grant to the designated managers will equal 10% of
the sum of the following:
. the outstanding shares of our Class A common stock and Class B common
stock;
. the shares of our Class A common stock underlying the vested and unvested
stock fund units under the CB Richard Ellis Services deferred
compensation plan;
. the shares of our Class A common stock issuable upon exercise of the
options granted to the designated managers, assuming all 1,820,397
options are granted;
. the shares of our Class A common stock issuable upon exercise of 910,199
options to acquire Class A common stock for a purchase price of $50.00
per share that will be available for grant to employees in the discretion
of our board of directors; and
. the shares of our Class B common stock issuable upon exercise of
warrants.
44
The exercise price for each of the options granted to the designated
managers will be $16.00 per share. Subject to the designated manager's
continued employment, the options will vest and become exercisable in 20%
increments on each of the first five anniversaries of the date of grant. All of
the options will become fully vested and exercisable upon a change of control
of us as defined in the option agreement. The options will not be exercisable
prior to their vesting. The options are non-transferable and can only be
exercised by the designated manager or his or her estate. Subject to earlier
termination if the designated manager no longer is employed by us, his or her
options will have a term of ten years. For additional information regarding the
termination and the term of the stock options, you should read the section of
this prospectus titled "Description of the Offering Documents--Option
Agreement."
Each designated manager who receives a grant of options to acquire our Class
A common stock will be required to sign an option agreement. For additional
information about the terms of the option agreement, you should read the
section of this prospectus titled "Description of the Offering Documents--
Option Agreement."
All of the stock options are intended to be non-qualified stock options and
are not intended to be treated as options that comply with Section 422 of the
Internal Revenue Code of 1986, which means that the designated manager will be
subject to taxation at ordinary income rates upon exercise of the stock
options. The options will be granted and the option shares will be issued under
our 2001 Stock Incentive Plan, which is described in the section of this
prospectus titled "Description of the Plans--2001 Stock Incentive Plan."
Full-Recourse Note for Designated Managers. Under the circumstances
described below, a designated manager may pay a portion of the purchase price
for the shares of Class A common stock that he or she purchases in this
offering using a full-recourse note having the terms described below. A full-
recourse note is one in which all of the assets of the borrower, not just the
stock being purchased with the note, are available to repay the note. The loan
represented by the full-recourse note will be made to you by us or, if we
determine, by a bank.
Unless our board of directors determines otherwise, in order to use a full-
recourse note in the offering of shares of Class A common stock for direct
ownership a designated manager must subscribe for the minimum number of shares
required for such designated manager to receive a grant of options as described
above. If the designated manager satisfies this requirement, the maximum amount
of the full-recourse note that he or she may use will be equal to 50% of the
aggregate purchase price of the minimum number of shares that must be
subscribed for by the designated manager in order to receive a grant of
options. The maximum amount of the full recourse note that may be used by a
designated manager will be reduced by the amount, if any, of the designated
manager's deferred compensation plan account balance currently allocated to the
insurance fund that he or she transfers to stock fund units at the closing of
the offerings.
For example, if a designated manager must subscribe for at least 6,250
shares for direct ownership in order to receive a grant of options, then that
designated manager may use a full-recourse note only if he or she subscribes
for at least 6,250 shares. If such designated manager subscribes for at least
6,250 shares, the maximum amount of the offering price that may be paid for by
the designated manager using a full-recourse note is $50,000 minus the amount,
if any, of the designated manager's deferred compensation plan account balance
currently allocated to the insurance fund that he or she transfers to stock
fund units at the closing of the offerings. The $50,000 maximum amount of the
full-recourse note represents 50% of the $100,000 purchase price for 6,250
shares. This maximum applies even if the designated manager subscribes for more
than 6,250 shares for direct ownership.
The terms of the note are described in the section of this prospectus titled
"Description of the Offering Documents--Full-Recourse Note."
Pledge Agreement. If a designated manager delivers a full-recourse note for
a portion of the aggregate purchase price for shares, then the designated
manager must deliver a pledge agreement, the terms of which are described below
in the section of this prospectus titled "Description of the Offering
Documents--Pledge
45
Agreement" and a form of which is included as an exhibit to the registration
statement that has been filed with the SEC.
Right of Repurchase for Designated Manager Shares. If a designated manager's
employment with us is terminated, we will have the right to repurchase a
portion of the shares that he or she purchased in the offering of shares for
direct ownership for the price described below. The amount of the shares
initially subject to this repurchase right immediately after the offerings will
be the minimum number of shares required for such designated manager to receive
a grant of options as determined by our board of directors. However, if the
number of shares actually purchased by the designated manager for direct
ownership is less than this amount, then all of the shares purchased for direct
ownership will be subject to the right of repurchase.
For example, if the minimum number of shares that must be subscribed for by
the designated manager in order to receive a grant of options is 6,250 shares,
and the designated manager subscribes for and purchases 6,250 shares or more,
then 6,250 shares will initially be subject to the right of repurchase. If the
designated manager only purchases 6,000 shares, then all of these shares will
initially be subject to the right of repurchase.
Upon each of the first five anniversaries of the closing of the merger
during which the designated manager remains employed by us, 20% of the shares
initially subject to repurchase will cease to be subject to this right. If the
designated manager's employment by us ends, then any remaining shares subject
to repurchase on that date will continue to remain subject to repurchase at all
times after that date.
The price for any shares that we repurchase pursuant to this right will be
the fair market value of the shares at the time the designated manager's
employment ends, unless the designated manager was terminated for cause or
voluntarily ended his or her employment for other than a good reason, in which
case the repurchase price will be the lesser of the fair market value and the
amount that the designated manager paid for those shares in the offering.
Any of the designated manager's shares that are subject to a right of
repurchase may not be sold by the designated manager while they are subject to
this right.
Subscription Agreement. Each designated manager and non-management employee
that purchases shares of our Class A common stock for direct ownership will be
required to sign a subscription agreement. The subscription agreement for
designated managers will include additional terms applicable to the full-
recourse note and the right of repurchase. For additional information about the
subscription agreements, you should read the sections of this prospectus titled
"Description of the Offering Documents--Subscription Agreements."
2001 Stock Incentive Plan. The shares of our Class A common stock being
offered for direct ownership will be issued under our 2001 Stock Incentive
Plan, which is described in the section of this prospectus titled "Description
of the Plans--2001 Stock Incentive Plan."
Offering of Shares to be held in CB Richard Ellis Services 401(k) Plan
We are offering to all of our U.S. employees who are currently participants
in the CB Richard Ellis Services 401(k) plan up to 889,819 shares of our Class
A common stock at an offering price of $16.00 per share. These shares will be
held in the CB Richard Ellis Services 401(k) plan, which will be amended to add
this new investment alternative. To participate in this offering, an employee
must either instruct the trustee of the 401(k) plan to sell existing
investments held by the employee in the 401(k) plan and use those proceeds to
purchase shares in this offering, or to use the proceeds, if any, received in
the merger by the employee for shares of CB Richard Ellis Services common stock
held by the employee in the 401(k) plan. To the extent that an employee holds
shares of CB Richard Ellis Services common stock in his or her 401(k) account
at the time of the merger and does not elect to use the merger proceeds for
these shares to participate in this offering, then he or she will be required
to instruct the trustee to invest the proceeds in one or more of the other
investment alternatives available under the CB Richard Ellis Services 401(k)
plan. Except for the ability to invest in shares
46
of our Class A common stock in the 401(k) plan, we expect the range of
available investment alternatives at the time of the merger to be substantially
the same as those that are currently available.
Limitations on Investment in 401(k) Stock Fund. As a group, our U.S.
employees currently participating in the CB Richard Ellis Services 401(k) plan
will be offered the opportunity to direct the trustee of the plan to purchase
for the CBRE Holding Common Stock Fund an aggregate of up to 889,819 shares of
our Class A common stock at an offering price of $16.00 per share. However, no
individual participant in the plan may invest in the CBRE Holding Common Stock
Fund more than 50% of his or her entire 401(k) plan account balance on the date
of this prospectus. If this offering is oversubscribed, the number of shares
that each participating employee is able to purchase will be reduced
proportionately based upon the total number of 401(k) plan shares for which we
receive subscriptions.
401(k) Plan Trustee and Election Form. U.S. Trust Company, National
Association has been retained by CB Richard Ellis Services to act as an
independent trustee of the CBRE Holding Common Stock Fund investment
alternative in the plan. In order to acquire shares of our Class A common stock
in this offering using his or her plan account, a participant in our 401(k)
plan at the time of the merger must affirmatively elect, prior to the
subscription deadline, to direct U.S. Trust, as stock fund trustee, to invest a
portion of his or her plan account in CBRE Holding shares after the merger, as
described above. In order to make this election, the participant will be
required to complete and return to U.S. Trust the election form described in
the section of this prospectus titled "Description of the Offering Documents--
401(k) Plan Instruction Form." If an employee has not furnished instructions to
the trustee using the appropriate completed election form prior to the
subscription deadline as described above, the employee will not be able to
participate in the offering of shares of our Class A common stock to be held in
the 401(k) plan.
Adequate Consideration Requirement. U.S. Trust will be obligated to follow
the purchase decisions made by participants unless it determines that the
instructions are not consistent with its fiduciary obligations under Employee
Retirement Income Security Act of 1974. In this regard, U.S. Trust will engage
an independent financial advisor and will only follow the purchase instructions
if it receives an opinion from this advisor that concludes that the purchase
price is fair to plan participants and constitutes not more than "adequate
consideration" for purposes of the ERISA.
Inability to Sell Shares Held in the Plan. In evaluating the offer of
securities to be purchased within the plan, and whether an investment in the
CBRE Holding Common Stock Fund satisfies the prudence requirements of ERISA for
retirement plan investments, participants should take into account that
following the merger they will not be able to sell those shares and invest the
proceeds in other investments under the plan.
Participants should also take into account that an investment in the CBRE
Holding Common Stock Fund may limit the participant's ability to receive loans
or hardship withdrawals from the plan, since assets held in the CBRE Holding
Common Stock Fund may not be used for loans or hardship withdrawals.
Voting and Plan Distributions. Participants will generally be entitled to
direct U.S. Trust with respect to the voting of shares allocated to their
accounts in the CBRE Holding Common Stock Fund consistent with the current
practice Vanguard has implemented with respect to the CB Richard Ellis Services
Common Stock Fund, which is described in the section of this prospectus titled
"Description of the Plans--CB Richard Ellis Services 401(k) Plan--Voting
Rights." To the extent a participant who is invested in the CBRE Holding Common
Stock Fund is entitled to a distribution under the plan, the participant will
have the right either to receive such portion of his or her distribution in
shares of CBRE Holding Class A common stock or to instruct the trustee to sell
the shares and receive the cash proceeds of the sale. If, the trustee cannot
otherwise sell the shares prior to an underwritten initial public offering
after which our Class A common stock is listed for trading on a national
securities exchange or quoted on the Nasdaq National Market, we will be
obligated to purchase these shares at the then fair market value.
47
Stockholders' Agreement. If a participant elects to receive a distribution
of shares, rather than cash, at any time prior to the earlier of the tenth
anniversary of the merger or 180 days after an underwritten initial public
offering of our Class A common stock after which our Class A common stock is
listed on a national securities exchange or the Nasdaq National Market, the
participant will be required to sign a stockholders' agreement if the
participant has not previously signed a subscription agreement other than with
respect to the provision regarding purchasing shares. This agreement will
include substantially the same provisions as the subscription agreement. For a
description of the terms of the subscription agreement, see "Description of the
Offering Documents--Subscription Agreements."
Amended 401(k) Plan. The CB Richard Ellis Services 401(k) plan, including
the amendments, is described in the section of this prospectus titled
"Description of the Plans--CB Richard Ellis Services 401(k) Plan."
Offering of Shares Underlying Stock Fund Units in CB Richard Ellis Services
Deferred Compensation Plan
A number of our current and former U.S. employees and independent
contractors in the states of California, New York, Illinois and Washington at
the time of the merger currently hold stock fund units in the CB Richard Ellis
Services deferred compensation plan. Each stock fund unit currently gives the
person that owns it the right to receive one share of CB Richard Ellis Services
common stock on future distribution dates as described in the plan. The
deferred compensation plan is being amended to provide that, after the merger,
each stock fund unit will entitle its holder to receive one share of our Class
A common stock on a future distribution date under the plan, rather than one
share of CB Richard Ellis Services common stock. We are offering to our current
U.S. employees and to our current independent contractors in the states of
California, New York, Illinois, and Washington up to 996,338 shares of our
Class A common stock that are issuable to these holders of stock fund units
upon future distributions under the CB Richard Ellis Services deferred
compensation plan.
Merger Agreement Provisions. Pursuant to the terms of the merger agreement,
at the effective time, the CB Richard Ellis Services deferred compensation plan
will be amended so that each stock fund unit will represent the right to
receive one share of our Class A common stock on a future distribution date as
described in the plan. Each of our U.S. employees and each of our independent
contractors in the states of California, New York, Illinois or Washington who
prior to the merger has vested stock fund units credited to his or her account
will be required, prior to the merger, to make one of the following elections
with respect to those vested stock fund units:
. convert the value of those stock fund units, based upon a value of
$16.00 per stock fund unit, into any of the insurance mutual fund or
interest index fund alternatives that are available under the deferred
compensation plan as of the effective time of the merger, or
. continue to hold those stock fund units in his or her account under the
deferred compensation plan.
If no election is made, those vested stock fund units will remain in the
deferred compensation plan after the merger and represent the right to receive
one share of our Class A common stock.
Every other participant in the deferred compensation plan who has stock fund
units credited to his or her account as of the merger that have vested prior to
the merger must convert the value of those stock fund units, based upon a value
of $16.00 per stock fund unit, into any of the insurance mutual fund or
interest index fund alternatives that are available under the deferred
compensation plan.
The offering of shares underlying stock fund units is being made pursuant to
this prospectus to permit our U.S. employees and independent contractors in the
states of California, New York, Illinois and Washington to continue to hold the
stock fund units and then receive a number of shares of our Class A common
stock upon future distributions under the deferred compensation plan equal to
the number of shares of CB Richard Ellis Services common stock that he or she
would have received prior to the amendment of the deferred compensation plan.
48
Any CB Richard Ellis Services stock fund units held by a participant in the
deferred compensation plan that have not vested prior to the time of the
merger, including any stock fund units that will vest as a result of the
merger, will automatically remain in the deferred compensation plan after the
merger. These stock fund units will represent the right to receive shares of
our Class A common stock on future distribution dates as described in the plan.
Additional Offering to Designated Managers. Our designated managers will
also have the right to transfer into stock fund units an aggregate of up to
$2.6 million of deferred compensation plan account balances that are currently
allocated to the insurance mutual fund under the deferred compensation plan. We
are offering up to 162,500 shares of our Class A common stock that are issuable
to those holders of stock fund units upon future distributions under the
deferred compensation plan.
Stockholder's Agreement. Prior to the earlier of the tenth anniversary of
the merger and 180 days after an underwritten initial public offering of our
Class A common stock after which our Class A common stock is listed on a
national securities exchange or the Nasdaq National Market, before a
participant may receive a distribution of shares of our Class A common stock
under the plan, if the participant has not previously signed a subscription
agreement he or she will be required to sign a stockholder's agreement. This
agreement will include substantially the same provisions, other than with
respect to the provisions regarding purchasing shares, as the subscription
agreement described below under the title "Description of the Offering
Documents--Subscription Agreements."
Amended Deferred Compensation Plan. The deferred compensation plan is
described in the section of this prospectus titled "Description of the Plans--
CB Richard Ellis Services Deferred Compensation Plan."
49
DETERMINATION OF OFFERING PRICE
The offering price for the shares of CBRE Holding Class A common stock being
offered by this prospectus was determined to be $16.00 per share because that
is the same cash price per share being paid by the BLUM Funds to acquire shares
of our Class B common stock and is the same cash price per share that will be
paid to holders of CB Richard Ellis Services common stock, other than members
of the buying group, under the merger agreement.
The common stock of CB Richard Ellis Services is currently traded on the New
York Stock Exchange under the symbol "CBG," but these shares will be delisted
from the NYSE upon completion of the merger. The following table sets forth the
high and low closing sale prices for shares of CB Richard Ellis Services common
stock, as reported on the New York Stock Exchange, for the periods listed.
High Low
------ ---------
Year Ended December 31, 1999
First quarter......................................... $19 13/16 $14 5/8
Second quarter........................................ 24 7/8 14 7/16
Third quarter......................................... 24 7/16 12 1/2
Fourth quarter........................................ 14 13/16 10 11/16
Year Ended December 31, 2000
First quarter......................................... 13 1/2 10 3/16
Second quarter........................................ 11 7/16 9 1/8
Third quarter......................................... 13 3/16 9 3/8
Fourth quarter........................................ 15 5/8 11 13/16
Year Ended December 31, 2001
First quarter......................................... 15.88 13.90
Second quarter ....................................... 15.80 14.08
On November 10, 2000, the last trading day prior to the public announcement
of BLUM CB Corp.'s merger proposal to the board of directors of CB Richard
Ellis Services, the high, low and closing sale prices for the common stock of
CB Richard Ellis Services as reported on the New York Stock Exchange were $13
1/8, $12 5/8 and $13 1/8 per share, respectively. On February 23, 2001, the
last trading day before the public announcement of the merger agreement, the
high, low and closing sale prices for the common stock of CB Richard Ellis
Services as reported on the New York Stock Exchange were $13.94, $13.68 and
$13.90 per share, respectively. On July 2, 2001, the closing price as reported
on the New York Stock Exchange was $15.64 per share.
The shares of CB Richard Ellis Services common stock and our Class A common
stock are not directly comparable and the trading price of shares of CB Richard
Ellis Services common stock are not necessarily indicative of the fair market
value of shares of our Class A common stock as a result of, among other things:
. the difference in the relative rights and restrictions;
. the greater amount of long-term indebtedness that we will have as
compared to CB Richard Ellis Services prior to the merger; and
. the relative lack of liquidity for shares of our Class A common stock,
which shares will not be listed on a national securities exchange.
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DESCRIPTION OF THE OFFERING DOCUMENTS
The following summarizes the subscription documents that apply to one or all
of the offerings, each of which is included as an exhibit to the registration
statement, of which this prospectus forms a part, filed with the Securities and
Exchange Commission. You should carefully read the subscription documents that
apply to any offering in which you decide to participate and not rely solely
upon the descriptions of those documents provided below.
Subscription Agreements
Generally
Any of the designated managers and non-management employees who participate
in the offering of shares for direct ownership will be required to execute and
deliver to us a copy of the relevant subscription agreement described below by
5:00 p.m. PST on July 13, 2001, which is the subscription deadline. The section
below titled "Description of Terms in All Subscription Agreements" summarizes
the terms that are in all of the subscription agreements. The subscription
agreements that will be made available to our designated managers for execution
and delivery to us will contain additional terms that are summarized in the
section below titled "Description of Terms in Only the Designated Manager
Subscription Agreements."
The subscription agreements will not apply to any shares that are held in
the CB Richard Ellis Services 401(k) plan or the shares underlying stock fund
units in the deferred compensation plan. However, the subscription agreement
will apply to shares received upon distributions from the 401(k) plan or the
deferred compensation plan. In addition, before someone who purchases shares to
be held in the 401(k) plan may receive any future distribution of those shares
pursuant to the terms of the plan, if he or she is not a party to a
subscription agreement he or she generally will be required to sign and deliver
to us a stockholder's agreement that is described in the section of this
prospectus titled "Description of the Plans--CB Richard Ellis Services 401(k)
Plan." In addition, before someone who participates in the offering of shares
of our Class A common stock underlying stock fund units in the CB Richard Ellis
Services deferred compensation plan may receive any future distribution of
those shares pursuant to the terms of the plan, if he or she is not a party to
a subscription agreement he or she generally will be required to sign and
deliver to us a stockholder's agreement that is described in the section of
this prospectus titled "Description of the Plans--CB Richard Ellis Services
Deferred Compensation Plan."
Risks Related to Subscription Agreements
If you participate in the offering of shares for direct ownership or receive
shares in a distribution from your 401(k) plan or deferred compensation plan
account, your ownership of shares of our Class A common stock will be subject
to significant restrictions under the subscription agreement, which will
subject you to numerous risks associated with your investment. To learn more
about these risks, you should read the section of this prospectus titled "Risk
Factors."
Description of Terms in All Subscription Agreements
The following terms are in both the subscription agreements that will be
provided to designated managers and the subscription agreements that will be
provided to non-management employees.
Assignment of Proceeds from Merger. Pursuant to the subscription agreement,
you may use some or all of the net cash proceeds that you would otherwise be
entitled to receive under the merger agreement for any shares of CB Richard
Ellis Services common stock that you own of record at the time of the merger or
options that you hold to acquire CB Richard Ellis Services common stock to
purchase shares of our Class A common stock for direct ownership. If you decide
to use your merger proceeds in this way, then you will be required to
irrevocably assign these cash proceeds to us under the subscription agreement.
As a result of this assignment, we will become entitled to receive those
proceeds from the merger as payment, in part or in whole, for the shares that
you purchase for direct ownership.
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We have attempted to structure the offerings so that, by irrevocably
assigning your right to receive the cash proceeds that you would have received
in the merger as payment to us for your Class A common stock, you can claim
that you exchanged shares of CB Richard Ellis Services common stock for our
Class A common stock in a tax-free exchange. There can be no assurance that the
Internal Revenue Service will agree with our characterization. This tax
treatment will not apply to merger proceeds you receive for options or for
shares acquired through the Special Incentive Plan whether or not you assign
your right to receive those proceeds to us. Therefore, any cash proceeds you
receive for options or for shares acquired through the Special Incentive Plan
will be fully taxable to you whether or not those proceeds are assigned to us
as payment for Class A common stock. For more information about the U.S.
federal income tax consequences of the merger and the offerings, see the
section of this prospectus entitled "U.S. Federal Tax Consequences."
If you decide to assign part of your merger proceeds to us as payment for
your shares for direct ownership, then following completion of the merger you
will receive your shares of Class A common stock when you deliver the share
certificates evidencing the shares whose merger proceeds you have assigned to
us. Your decision to assign the merger proceeds from any shares of CB Richard
Ellis Services' common stock will not affect your ability to sell those shares
of common stock prior to the merger.
Legends and Additional Shares Acquired. Each certificate representing shares
of Class A common stock held directly will have a legend on it stating that the
holder of the certificate agrees to be bound by the provisions of the
subscription agreement, including the restrictions on transfer described below.
In addition, any additional shares of our Class A common stock that are
acquired by an employee who signs a subscription agreement, including as a
result of a permitted transfer from any other employees or as a result of the
exercise of stock options, generally will be subject to the terms of the
subscription agreement.
Representations and Warranties. Under the terms of the subscription
agreement, the employee will represent and warrant to us as to each of the
following on the date that the subscription agreement is signed by him or her:
. the employee is competent to, and has sufficient capacity to, execute
and deliver the subscription agreement, as well as the full-recourse
note and the pledge agreement, if applicable to the employee;
. the subscription agreement, as well as the full-recourse note and the
pledge agreement, if applicable to the employee, have been duly executed
and delivered and constitute valid and binding obligations of the
employee enforceable against the employee in accordance with their
terms;
. the number of shares of CB Richard Ellis Services common stock for which
the employee is the record owner is correctly identified in the
subscription agreement; and
. the employee understands that the shares subject to the agreement will
be subject to restrictions and limitations, including with respect to
transfers, and has read this prospectus, including the section titled
"Risk Factors."
We will give representations and warranties regarding the subscription
agreement to you similar to those described in the first two bullet points
immediately above.
Conditions to Subscription. After the employee has signed and delivered the
subscription agreement, we are not obligated to complete the sale of shares to
the employee unless each of the following conditions have been satisfied:
. the employee has delivered payment in full for the shares;
. the employee has executed and delivered to us (1) the stock purchase
agreement described below and, (2) if applicable to the employee, the
full-recourse note, the pledge agreement and the stock power for
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the shares of CB Richard Ellis Services common stock for which the
employee is the record owner if the employee is assigning any of his or
her merger proceeds to us; and
. the merger has been completed.
Your obligation under the subscription agreement to purchase the shares of
Class A Common Stock that you subscribe for will generally be subject to the
condition that the merger has been completed.
General Transfer Restrictions. Prior to the earlier of the tenth anniversary
of the merger and 180 days after we close a qualifying initial public offering
of our Class A common stock, which is described below, shares of our Class A
common stock owned by the employee will have significant restrictions on
transfer. Generally, the only persons or entities to which these shares may be
transferred prior to the end of the transfer restriction period are the
following:
. the employee's spouse, parent, descendant, step-child or step-
grandchild, or any executor, estate, guardian, committee, trustee or
other fiduciary acting solely on behalf or solely for the benefit of any
spouse, parent, descendant, step-child or step-grandchild;
. any trust, corporation, partnership or limited liability company, all of
the beneficial interests in which are held, directly or indirectly, by
the employee and/or one or more of the individuals listed in the prior
bullet point, so long as during the period that any trust, corporation,
partnership or limited liability company holds any right, title or
interest in any shares of our Class A common stock, no person other than
the employee or the individuals listed in the prior bullet point may be
or become beneficiaries, stockholders, general partners or members of
any trust, corporation, partnership or limited liability company;
. us;
. RCBA Strategic, Blum Strategic Partners II, Freeman Spogli or any of
their respective affiliates; and
. except for shares owned by designated managers subject to a right of
repurchase, which are described in the section titled "Description of
Terms in Only the Designated Manager Subscription Agreements--Repurchase
Right" below, any of our other employees who has signed a subscription
agreement or who agrees to be subject to the terms of the transferring
employee's subscription agreement.
Assumption Agreement. If shares are transferred to anyone described in the
first two bullet points above, prior to the transfer, both the transferring
employee and the transferee must sign and deliver to us an assumption
agreement. Under the assumption agreement, the transferor will remain subject
to the subscription agreement and the transferee generally will become subject
to most of the terms of the subscription agreement, including all of the
limitations on transfers. After the transfer, if the transferee at any time
ceases to have the same status described in the first two bullet points above
that allowed the initial transfer to occur, then the transferee will be
required to transfer back to the transferring employee any shares received by
the transferee.
Qualifying Initial Public Offering. Under the terms of the subscription
agreement, a "qualifying initial public offering" means an underwritten
offering of our Class A common stock to the public after the effective time of
the merger pursuant to an effective registration statement filed under the
Securities Act pursuant to which our Class A common stock becomes listed on a
national securities exchange or authorized for quotation on the Nasdaq National
Market.
Co-Sale Right. Prior to the end of the transfer restrictions, if a majority
of the outstanding shares of our Class A and Class B common stock, taken
together, are sold to anyone other than RCBA Strategic and its affiliates, then
the employee will be able to sell the same proportion of his or her shares of
Class A common stock that are not subject to a right of repurchase as are being
sold by the other selling stockholders. If the employee exercises this right,
the sale of his or her shares will generally be on the same terms as the sale
of a majority of our outstanding shares that triggered that right. However, in
the event that the purchaser requires that the sale be structured as a
recapitalization for financial accounting purposes then the form of
consideration paid to the majority selling stockholders may differ from the
form paid to the employee.
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In order to participate in this sale, the employee generally will be
required to make the same representations and warranties, and provide related
indemnification, to the proposed purchaser regarding the ownership of, and
title to, the shares being sold by the employee as the majority sellers make
regarding the shares they are selling. In addition, the employee will be
required to pay his or her pro rata share of any liability arising out of any
representations, warranties, covenants or agreements between the sellers and
the purchaser that survive the closing of the sale and do not relate to the
ownership of, or title to, the shares being sold.
The co-sale right does not apply to any underwritten offering of our
securities to the public pursuant to an effective registration statement under
the Securities Act of 1933.
Required Sale. To the extent permitted by applicable law, prior to the end
of the transfer restrictions, if any of our stockholders sell a majority of the
outstanding shares of our Class A and Class B common stock, taken together, to
anyone other than RCBA Strategic and its affiliates, then these selling
stockholders will be able to require the employee to sell to the same proposed
transferee the same proportion of the shares of Class A common stock owned by
the employee as are being sold by the stockholders selling a majority of the
outstanding shares. If the selling stockholders exercise this right, the sale
of the employee's shares of Class A common stock will generally be on the same
terms as the sale of a majority of our outstanding Class A and Class B common
stock that triggered such sale. However, in the event that the purchaser
requires that the sale be structured as a recapitalization for financial
accounting purposes, then the form of consideration paid to the majority
selling stockholders may differ from the form paid to the employee.
In connection with this sale, the employee generally will be required to
make the same representations and warranties, and provide related
indemnification, to the proposed purchaser regarding the ownership of, and
title to, the shares being sold by the employee as the majority sellers make
regarding the shares they are selling. In addition, the employee will be
required to pay his or her pro rata share of any liability arising out of any
representations, warranties, covenants or agreements between the sellers and
the purchaser that survive the closing of the sale and do not relate to the
ownership of, or title to, the shares being sold.
The required sale right does not apply to any underwritten offering of our
securities to the public pursuant to an effective registration statement under
the Securities Act of 1933.
Other Agreements. In addition to the provisions described above, the
subscription agreement also includes, among others, the following agreements:
. Holdback Agreement. In connection with any initial underwritten offering
of shares of our Class A common stock to the public pursuant to a
registration statement filed under the Securities Act of 1933, the
employee will agree not to sell any shares of our Class A common stock
or any securities exchangeable or exercisable for, or convertible into,
shares of our Class A common stock during the period beginning 30 days
prior to the effective date of the applicable registration statement and
ending 180 days after the effective date.
. Confidentiality. The employee generally agrees that, except as required
by law, he or she will not, during his or her term of employment or for
five years afterwards, disclose any non-public confidential information
about us and our affiliates to any person, other than our responsible
officers and employees, without our prior written consent.
. Arbitration. We and the employee generally agree that all disputes
arising under, or in connection with the interpretation of, the
subscription agreement will be resolved solely through confidential
binding arbitration proceedings.
Termination in Event of Sale. Most provisions in the subscription agreement
will terminate upon the sale of all or substantially all of our equity
interests to anyone other than our stockholders, whether by merger,
consolidation or otherwise.
Shares Subject to the 2001 Stock Incentive Plan. The shares of Class A
common stock purchased for direct ownership pursuant to the subscription
agreement are subject to the 2001 Stock Incentive Plan. In the
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event of a conflict between any term or provision of the 2001 Stock Incentive
Plan and any term or provision of the subscription agreement, the applicable
terms and provisions of the subscription agreement will govern and prevail. To
learn more about this plan, you should read the section of this prospectus
titled "Description of the Plans--2001 Stock Incentive Plan."
Description of Terms in Only the Designated Manager Subscription Agreements
Repurchase Right. If a designated manager's employment with us is
terminated, we will have the right to repurchase a portion of the shares that
he or she purchases in the offering of shares for direct ownership for the
price described below. We will be required to exercise this right within 180
days after the designated manager's employment ends. The amount of the shares
initially subject to this repurchase right will be the minimum number of shares
required for such designated manager to receive a grant of options as
determined by our board of directors. However, if the number of shares actually
purchased by the designated manager for direct ownership is less than this
amount, then all of the shares purchased for direct ownership will initially be
subject to the right of repurchase.
For example, if the minimum number of shares that must be subscribed for by
the designated manager in order to receive a grant of options is 6,250 shares,
and the designated manager subscribes for and purchases 6,250 shares or more,
then 6,250 shares will initially be subject to the right of repurchase. If the
designated manager only purchases 6,000 shares, then all of these shares will
initially be subject to the right of repurchase.
Upon each of the first five anniversaries of the closing of the merger
during which the designated manager remains employed by us, 20% of the shares
initially subject to repurchase will cease to be subject to this right. If the
designated manager's employment by us ends, then any remaining shares subject
to repurchase on the date employment ends will continue to remain subject to
repurchase at all times after that date. Any of the designated manager's shares
subject to our right of repurchase may not be sold by the designated manager
while they are subject to this right.
The repurchase price for the shares is the fair market value of the shares
at the time the designated manager's employment ends, unless the designated
manager was terminated for cause or voluntarily ended his or her employment for
other than good reason, in which case the repurchase price is the lesser of the
fair market value and the amount that the designated manager paid for those
shares in the offerings. Prior to a qualifying initial public offering, which
is described in the section titled "General Transfer Restrictions" above, the
"fair market value" of the shares will be determined in good faith and on a
consistent basis by our board of directors, disregarding any discount for
minority interests, restrictions on transfer or lack of marketability.
Under the designated manager subscription agreements, the following
definitions are used:
. "cause" means (1) the willful failure of the designated manager to
perform his or her duties to us or our subsidiaries which is not cured
following written notice, (2) the conviction of the designated manager
of a felony, (3) willful malfeasance or misconduct by the designated
manager that is materially and demonstrably injurious to us or our
subsidiaries or (4) the breach by the designated manager of the material
terms of the full-recourse note, the pledge agreement or the designated
manager subscription agreement, including, without limitation, the
provisions described below regarding transfer restrictions, business
opportunities, confidentiality and discharge of indebtedness; and
. "good reason" means (1) a substantial diminution in the designated
manager's position or duties with us or our subsidiaries, an adverse
change in the reporting lines of the designated manager, or the
assignment to the designated manager by us or our subsidiaries of duties
materially inconsistent with his or her position with us or our
subsidiaries, (2) any reduction in the designated manager's base salary
or any material adverse change in the designated manager's bonus
opportunity or (3) our failure or that of our subsidiaries to pay the
designated manager's compensation or benefits when due; in each of the
foregoing clauses (1) through (3) which is not cured within 30 days
following our receipt of written notice from the designated manager
describing the event that would constitute good reason if not cured
within the 30 day period.
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Shares that are subject to a right of repurchase may not be transferred by
the designated manager.
Sale Right. Prior to the end of the transfer restrictions, if the designated
manager's employment by us ends and we have not exercised our repurchase right
at least 20 days prior to the date that the designated manager's full-recourse
note becomes due and payable, as described below under the section titled
"Full-Recourse Note," then the designated manager may require us to repurchase
the number of shares of our Class A common stock held by the designated manager
necessary to repay the full-recourse note on the date it becomes due and
payable. In order to exercise this sale right, the designated manager must
deliver a notice to us indicating the exercise no later than 10 days prior to
the date that the full-recourse note becomes due and payable. The purchase
price for the shares that we buy upon exercise of the designated manager's sale
right will be the same as we would pay if we had exercised the repurchase right
described above. The entire purchase price for the shares will be applied to
the repayment of the note. If the purchase price for these shares is not
sufficient to repay the note in full then the designated manager will remain
personally obligated to repay the remaining amount of the note.
Required Section 83(b) Tax Election. Each designated manager will be
required to make an election under section 83(b) of the Internal Revenue Code
with respect to any shares purchased that are subject to our repurchase right,
which election means that the designated manager will have taxable ordinary
income equal to the excess, if any, of the fair market value of the shares over
the amount the designated manager paid for those shares. However, we believe
that the purchase price of those shares will be equal to their fair market
value and, accordingly, that the election will not result in any taxable income
to the designated managers.
Full-Recourse Note
Under the circumstances described in the section of this prospectus titled
"The Offerings," a designated manager may pay a portion of the purchase price
for the shares of Class A common stock that he or she purchases in the offering
of shares for direct ownership using a full-recourse note having the terms that
are summarized below. The loan represented by the full-recourse note will be
made to you by us or, if we determine, by a bank. If the loan is made by a bank
we will guarantee to the bank the performance by you of your obligations under
the note.
Interest and Payment. Interest will accrue on the principal amount of the
full-recourse note at a market rate that we currently expect to be
approximately 10% per year, compounded annually, and payable in cash on each
March 31, June 30, September 30 and December 31 prior to the payment in full of
all unpaid principal and accrued and unpaid interest. All accrued and unpaid
interest, together with all unpaid principal, if not paid sooner, will be due
on the earliest of:
. the 9th anniversary of the loan;
. 30 days after the termination of the designated manager's employment by
us with cause or by the designated manager without good reason;
. 180 days after the termination of the designated manager's employment by
us without cause, by the designated manager for good reason or upon the
designated manager's death or disability;
. the acceleration of the maturity of the loan as described below; or
. the designated manager's receipt of any proceeds of the sale of the
common stock subject to the pledge agreement, but only to the extent of
the after tax proceeds from such sale.
The definitions of "cause" and "good reason" are the same as those described
above in the section titled "Subscription Agreements--Description of Terms in
Only the Designated Manager Subscription Agreements--Repurchase Right." Any
overdue amount under the full-recourse note will bear an annual interest rate
of 12%, compounded annually.
If the designated manager's employment with us is terminated due to his or
her death or disability, the repayment obligations under the note will be
satisfied only to the extent of the shares of our Class A common stock that are
pledged as security for the note. Under all other circumstances, if the
proceeds from the sale of
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the pledged shares are less than the remaining outstanding balance of the note
and accrued and unpaid interest, the unpaid balance of the note will remain
outstanding as an obligation of the designated manager.
Acceleration. The outstanding principal amount and accrued interest on a
note will automatically become due and payable if:
. the designated manager commences an action under any law relating to
bankruptcy, insolvency or relief of debtors;
. there is commenced against the designated manager an action under any
law described in the prior bullet point which results in the entry of an
order for relief or the action remains undismissed for a period of 60
days; or
. the designated manager otherwise becomes insolvent.
In the event that the designated manager defaults in any payment obligation
under the full-recourse note or in any agreement contained in the pledge
agreement, the full-recourse note may be accelerated by delivery of a written
notice to the designated manager. If a notice of acceleration is delivered, the
unpaid outstanding principal amount of the note and all the accrued and unpaid
interest will become immediately due and payable, without presentment, demand,
protest or further notice of any kind, all of which are expressly waived by the
designated manager in the full-recourse note.
Pledge Agreement
If a designated manager pays a portion of the purchase price for shares of
our Class A common stock to be directly owned by delivering a full-recourse
note, the designated manager must pledge as security for the note a number of
these shares having an offering price equal to 200% of the amount of the note.
The pledged shares will be held pursuant to a pledge agreement. Under the
pledge agreement, the designated manager will pledge and grant to us or the
bank lender, as applicable, a first priority security interest in all of the
pledged shares, as well as any proceeds derived from the pledged shares.
In connection with the pledging of the pledged shares, we or the bank
lender, as applicable, will take possession of the certificates representing
the pledged shares at the time of the closing of the offerings and the
designated manager will be required to execute and deliver to us prior to the
closing of the offerings an assignment that we will make available to the
designated manager. The designated manager will also be required to make to us
or the bank lender, as applicable, a representation and warranty that there are
no other encumbrances on the pledged shares. The pledged shares will be held by
us or the bank lender, as applicable, until the repayment of all principal and
all accrued but unpaid interest on the full-recourse note.
Without our or the bank lender's, as applicable, prior written consent, the
designated manager may not transfer the pledged shares, incur any liens or
interests in favor of any other persons on the pledged shares or otherwise
enter into any agreements that would restrict our right to transfer the pledged
shares. Unless the designated manager has defaulted on the note, while we or
the bank lender, as applicable, hold the pledged shares the designated manager
will retain the right to vote and receive any dividends declared on the shares,
although we or the bank lender, as applicable, will have a lien on any
dividends received by the designated manager prior to the repayment in full of
the note.
If any obligation under the full-recourse note is not paid in full when due
or accelerated, after notifying the designated manager we or the bank lender,
as applicable, will have the right to receive any and all cash payments paid,
and be able to exercise all the rights of the designated manager, with respect
to the pledged shares. Also, we or the bank lender, as applicable, will have
and may exercise all rights and remedies of a secured creditor under applicable
New York law, including selling the pledged shares. If the proceeds from the
sale of the pledged shares are less than the remaining outstanding balance of
the note and accrued and unpaid interest, unless the designated manager
previously has died or become disabled, the unpaid portion of the note will
remain outstanding as an obligation of the designated manager. To the extent
permitted by law, the designated manager agrees to waive all claims and damages
against us or the bank lender, as applicable, arising out of the exercise of
our or their rights.
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The designated manager also will agree to deliver all further documents or
take all further action to perfect and protect the pledge of the shares and the
first priority security interest granted to us or the bank lender and will
authorize us or the bank lender, as applicable, to file a financing statement
with respect to the collateral with the signature of the designated manager as
appropriate. The designated manager will further agree to pay and indemnify us
or the bank lender, as applicable, and our or their directors, employees and
affiliates for any and all liabilities and expenses related to or arising from
the full-recourse note or the pledge agreement or any exercise of remedies
under either the note or the pledge agreement.
The pledge agreement will be a continuing assignment and remain effective
until all obligations under the full-recourse note are paid. Once the
obligations are fully paid, the designated manager will be entitled to the
return of the note and the release of the security interest in the pledged
shares.
Option Agreement
Each designated manager who receives a grant of options to acquire our Class
A common stock in connection with the offering of shares of our Class A common
stock for direct ownership will be required to sign an option agreement. For
additional information regarding the circumstances under which the designated
managers may receive grants of options, you should read the section of this
prospectus titled "The Offerings--Description of the Offerings. "
Grant of the Options. The options are intended to be non-qualified stock
options and are not intended to be treated as options that comply with Section
422 of the Internal Revenue Code of 1986, as amended.
Vesting Schedule. The options will vest and become exercisable with respect
to 20% of the shares of our Class A common stock subject to the options on the
first, second, third, fourth and fifth anniversaries of the date of grant.
Prior to vesting, the options will not be exercisable. Upon a change of
control, all options will become fully vested and exercisable. Under the 2001
Stock Incentive Plan, which together with the option agreement governs the
terms of the stock options, a "change of control" is generally defined as
either of the following:
. the sale or disposition, in one or a series of related transactions, of
all, or substantially all, of the assets of CBRE Holding to any "person"
or "group", as defined in Sections 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, other than RCBA Strategic, Freeman Spogli or their
affiliates; or
. any person or group, other than RCBA Strategic, Freeman Spogli or their
affiliates, is or becomes the beneficial owner, directly or indirectly,
of more than 50% of the total voting power of the voting stock of CBRE
Holding, including by way of merger, consolidation or otherwise, and the
representatives of RCBA Strategic, Freeman Spogli or their affiliates,
individually or in the aggregate, cease to have the ability to elect a
majority of the board of directors of CBRE Holding; for our purposes, a
member of a group will not be considered to beneficially own the
securities owned by other members of the group.
Termination of Employment. If the designated manager's employment with us is
terminated for any reason, the options will, to the extent not then vested, be
canceled by us without consideration. However, in the case of Messrs. Wirta or
White, (1) if his employment is terminated by us without cause or if he resigns
from his employment with us for good reason, the options will immediately vest
and become exercisable for all the shares subject to the options, or (2) if his
employment is terminated due to his death or disability, the options will
immediately vest and become exercisable for the number of shares with respect
to which the options would have become vested and exercisable in the calendar
year of the termination of employment.
Period of Exercise. The designated manager may exercise the vested portion
of the options at any time prior to the earliest to occur of:
. the tenth anniversary of the date of grant;
. one year following the date of the designated manager's termination of
employment as a result of death or disability;
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. ninety days following the date of the designated manager's termination
of employment by us without cause, other than as a result of death or
disability, or by the designated manager for any reason; and
. the date of the designated manager's termination of employment by us for
cause.
For purposes of the option agreement:
"cause" means (1) the designated manager's willful failure to perform duties
to us, which is not cured within ten days, (2) the designated manager's
conviction of a felony, (3) the designated manager's willful malfeasance or
misconduct which is materially and demonstrably injurious to us or (4) breach
by the designated manager of the material terms of any confidentiality
provisions to which the designated manager is subject;
"disability" means the inability of a designated manager to perform in all
material respects his or her duties and responsibilities to us, for a period of
six consecutive months or for an aggregate of nine months in any twenty-four
consecutive month period by reason of a physical or mental incapacity; and
"good reason" means (1) a substantial diminution in the designated manager's
position or duties, adverse change in reporting lines, or assignment of duties
materially inconsistent with his or her position, (2) any reduction in the
designated manager's base salary or material adverse change in the designated
manager's bonus opportunity or (3) our failure to pay compensation or benefits
to the participant when due under an employment agreement, in each case which
is not cured within 30 days after notice.
Method of Exercise. The vested portion of the options may be exercised by
delivering to us at our principal office written notice of intent to so
exercise. The notice must specify the number of shares for which the options
are being exercised and be accompanied by payment in full of the option price.
The purchase price for the shares as to which options are exercised must be
paid to us in full at the time of exercise at the election of the designated
manager (1) in cash or its equivalent, such as by check, (2) in shares of our
Class A common stock having a fair market value equal to the aggregate option
price for the shares being purchased and satisfying any other requirements
imposed by us, as long as the shares have been held by the designated manager
for no less than six months, or any other period as established from time to
time by us in order to avoid adverse accounting treatment when applying U.S.
generally accepted accounting principles, (3) partly in cash and partly in
shares or (4) if shares of Class A common stock are listed on a national
securities exchange or quoted on the Nasdaq National Market at the time,
through the delivery of irrevocable instructions to a broker to sell shares
obtained upon the exercise of the option and to deliver promptly to us an
amount out of the proceeds of the sale equal to the aggregate option price for
the shares being purchased. The designated manager will also be required to pay
all withholding taxes relating to the exercise.
Unless there is an available exemption the options may not be exercised
prior to any registration or qualification of the options or the shares
required to comply with applicable state and federal securities laws or with
any ruling or regulation of any governmental body or national securities
exchange that we in our sole discretion determine in good faith to be necessary
or advisable. We expect to file, shortly after the effectiveness of the
registration statement for these offerings, a registration statement on Form S-
8 under the Securities Act covering all shares of Class A common stock
underlying the options we grant to designated managers in the offering, as well
as all other shares reserved for issuance under the 2001 Stock Incentive Plan.
Should the designated manager die while holding the options, the vested
portion of the options will remain exercisable by the executor or administrator
of the designated manager's estate, or the person or persons to whom the
designated manager's rights will pass by will or by the laws of descent and
distribution. Any heir or legatee of the designated manager will take the
options subject to the terms and conditions of the 2001 Stock Incentive Plan
and the option agreement.
Legend on Certificates. The certificates representing the shares issued upon
exercise of an option will contain a legend stating that they are subject to
the subscription agreement and may be subject to any stop
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transfer orders or other restrictions we may deem advisable and we may cause an
additional legend or legends to be put on any certificates to make appropriate
reference to other restrictions.
Transferability. Except as otherwise permitted by us, the options are
exercisable only by the designated manager during the designated manager's
lifetime and may not be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by the participant otherwise than by will
or by the laws of descent and distribution.
Withholding. A designated manager shall be required to pay to us and we
shall have the right to withhold any applicable withholding taxes in respect of
the options, their exercise or any payment or transfer under the options or
under the 2001 Stock Incentive Plan.
Securities Laws. Upon the acquisition of any shares pursuant to the exercise
of the options, the participant will make or enter into written
representations, warranties and agreements that we may reasonably request in
order to comply with applicable securities laws or with the option agreement.
No Right to Continued Employment. Neither the 2001 Stock Incentive Plan nor
the option agreement may be construed as giving the designated manager the
right to be retained in employment by us. Further, we may at any time terminate
the designated manager's employment, free from any liability or any claim under
the plan or the option agreement without regard to due process or any
obligation of good faith and fair dealing.
Shares Subject to Plan and Subscription Agreement. The shares are subject to
the 2001 Stock Incentive Plan and the subscription agreement. In the event of a
conflict between any term or provision contained in the option agreement and a
term or provision of the 2001 Stock Incentive Plan or the subscription
agreement, the applicable terms and provisions of the 2001 Stock Incentive Plan
or the subscription agreement, as applicable, will govern and prevail. In the
event of a conflict between any term or provision of the 2001 Stock Incentive
Plan and any term or provision of the subscription agreement, the applicable
terms and provisions of the subscription agreement will govern and prevail.
401(k) Plan Instruction Form
Upon the terms and conditions described in the section of this prospectus
titled "The Offerings--Description of the Offerings," each of our U.S.
employees who currently is a participant in the CB Richard Ellis Services
401(k) plan will be able to instruct the trustee of the 401(k) plan to invest a
portion of his or her account balance in shares of our Class A common stock
that we are offering by this prospectus. In order for an eligible participant
to participate in this offering, the participant must complete, sign and return
to the U.S. Trust Company a form of "Instructions to the Trustee" that U.S.
Trust will make available to each of the plan participants prior to the merger.
In this form, if a participant would like to purchase shares of our Class A
common stock to be held in his or her plan account, the participant will be
required to identify the number of shares that the participant would like U.S.
Trust to purchase in the offering. However, in the event that the offering of
shares to be held in the 401(k) plan is over-subscribed, meaning U.S. Trust
receives instructions to purchase more than the shares we have set aside
in that offering, the amount of shares that each participant will be able to
purchase in that offering will be reduced proportionately based upon the total
number of 401(k) plan shares for which U.S. Trust receives instructions from
all participating employees. Also in the form, if the participant is requesting
U.S. Trust to purchase shares of our Class A common stock, the participant must
instruct it to purchase the shares either by selling one or more investments in
the participant's account and/or by applying the proceeds that the participant
receives in the merger for the shares of CB Richard Ellis Services common stock
that the participant holds in his or her 401(k) plan account, if any. If the
participant would like to sell investments in his or her account to pay for all
or part of the shares of our Class A common stock that will held in his or her
account, then the participant will also need to complete and return to Vanguard
Fiduciary Trust Company a form identifying which investments the participant
would like to sell and in what amounts.
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DCP Election Form
Upon the terms and conditions described in the section of this prospectus
titled "The Offerings--Description of the Offerings," each of our U.S.
employees and our independent contractors in the states of California, New
York, Illinois and Washington at the time of the merger that holds stock fund
units in his or her deferred compensation plan account that were vested prior
to the time of the merger will be required to make one of the following
elections:
. convert the value of those stock fund units, based upon a value of
$16.00 per stock fund unit, into any of the insurance mutual fund or
interest index fund alternatives that are available under the deferred
compensation plan as of the effective time of the merger, or
. continue to hold those stock fund units in his or her account under the
deferred compensation plan.
In order to make this election, the employee or independent contractor must
complete, sign and return to CB Richard Ellis Services a form that it will make
available to each of the eligible participants prior to the merger.
In this form, each of the eligible participants in the offering of shares of
our Class A common stock underlying stock fund units will be required to
identify the following:
. how many of his or her stock fund units that were vested prior to the
merger he or she chooses to continue to hold in the plan after the
offering, if any; and
. if he or she chooses to convert the value of his or her units to another
alternative under the plan, which alternatives he or she chooses to
convert the units into.
In addition, upon the terms and conditions described in the section of this
prospectus titled "The Offerings--Description of the Offerings," each of the
designated managers that decides to transfer into stock fund units a portion of
his or her deferred compensation plan account balance that is currently
allocated to the insurance mutual fund under the deferred compensation plan
will be required to complete, sign and return to CB Richard Ellis Services a
form that it will make available to each of the designated managers prior to
the merger.
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DESCRIPTION OF THE PLANS
CB Richard Ellis Services Deferred Compensation Plan
The CB Richard Ellis Services, deferred compensation plan, was adopted in
1994 and has undergone numerous amendments. As currently in effect, the
deferred compensation plan permits a select group of management employees, as
well as highly compensated employees, which generally are those whose
compensation exceeds $100,000 a year, to elect immediately prior to the
beginning of each calendar year to defer receipt of some or all of their
compensation for the next year until a future distribution date and have it
credited to one of three funds in the deferred compensation plan. From the
participating employee's standpoint, these funds are bookkeeping accounts
representing the right to receive a future distribution from us and the
participant has no claim to any assets of CB Richard Ellis Services or its
affiliates. The three funds are as follows:
. The Insurance Fund. A participant may elect to have his or her deferred
compensation allocated to the Insurance Fund. Within the Insurance Fund
the employee can elect to have gain or loss on deferrals measured by one
or more of approximately 30 mutual funds. CB Richard Ellis Services
hedges its obligations to the participants under the Insurance Fund by
actually buying a contract of insurance within which it has premiums
invested in the mutual funds which participants have elected to measure
the value of their deferred compensation. Historically, CB Richard Ellis
Services has held the insurance contract in a Rabbi Trust. The
participants have no interest in or claim to the Rabbi Trust, the
insurance contract or the mutual funds within the insurance contract;
they are merely general unsecured creditors of CB Richard Ellis Services.
The insurance contract and the Rabbi Trust are assets of CB Richard Ellis
Services available to its general creditors, including the deferred
compensation plan participants, in the event of the bankruptcy or
insolvency of CB Richard Ellis Services.
. The Stock Fund. A participant may elect to have his or her deferrals
allocated to the CB Richard Ellis Stock Fund, except that after the
effective date of the merger such allocations may only be made with our
consent. In the event a deferral is to be allocated to the Stock Fund,
the amount of the deferral is divided by the closing price of CB Richard
Ellis Services common stock on the New York Stock Exchange on the date of
the deferral, or its fair value on that date if the deferral is after the
effective date of the merger, and the result equals the number of stock
fund units credited to the participant's account. Each stock fund unit
has a value equal to one share of CB Richard Ellis Services common stock
or, after the merger, one share of our Class A common stock. Participants
in the Stock Fund have greater risk than the participants in the other
deferred compensation plan funds because their only right in the event of
a bankruptcy or insolvency is to receive shares of common stock of CB
Richard Ellis Services, or our Class A common stock after the merger, and
holders of these shares would only receive those of our assets remaining
in bankruptcy or insolvency after the claims of all our creditors,
including deferred compensation plan participants with allocations in the
Interest Index Funds and the Insurance Fund, have been satisfied.
. Interest Index Funds. From the deferred compensation plan's inception in
1994 until May of 1999 participants could elect to have their deferrals
allocated to an Interest Index Fund, which we refer to as "Interest Index
Fund I." All these allocations were then credited with interest at the
rate payable by CB Richard Ellis Services under its principal credit
agreement. Interest Index Fund I was suspended in April 1999 and no new
deferrals were permitted to be allocated to it. Effective June 1, 2001 a
new Interest Index Fund, which we refer to as "Interest Index Fund II,"
will be established. All deferrals allocated to Interest Index Fund II
will be credited with interest at 11 1/4% per year for five years, or
until distributed if earlier, and after that time at a rate no lower than
the rate CB Richard Ellis pays under its principal credit agreement. The
deferrals to Interest Index Fund II will not be funded with a Rabbi Trust
or otherwise. Interest Index Fund II will only accept up to $20 million
in deferrals, other than pursuant to the 2000 Company Match Program
described below. A participant may elect to move allocations from the
Insurance Fund--but not the Stock Fund or Interest Index Fund I--into
Interest Index Fund II. After five years CB Richard Ellis Services
reserves the right to terminate Interest Index Fund II. In that event a
participant's account balance in Interest Fund II either will be
distributed in cash
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to the participant or invested in the Insurance Fund. If a participant's
account balance in Interest Index Fund II is to be invested in the
Insurance Fund, CB Richard Ellis Services will transfer cash equal to the
account balance into the Rabbi Trust for the Insurance Fund. The choice
between a cash distribution and a new investment in the Insurance Fund is
that of the participant, but the choice must be made prior to January 1,
2002. If a participant does not make a choice prior to January 1, 2002, he
or she will be deemed to have elected a cash distribution.
Distribution Payments. The deferred compensation plan permits participants
to elect in service distributions, which may not begin less than three years
following the election, and post-employment distributions. These distributions
may be (a) in the form of a lump sum payment on a date selected by the
participant or (b) in a series of quarterly installment payments, or annual
installment payments in the case of stock fund units. Stock fund units are
distributed only in the form of shares of common stock of CB Richard Ellis
Services, or our Class A common stock after the merger. Separate distribution
elections are permitted with respect to the deferrals for each year. There is
limited flexibility to change distribution elections once made. A participant
may elect to receive a distribution of his or her vested accounts at any time
subject to a charge equal to 10% of the amount to be distributed.
Company Match Program. The Company Match Program is a part of the deferred
compensation plan and was in effect for just two years--1999 and 2000 and is
not expected to be in effect in 2001. Under the Company Match Program, CB
Richard Ellis allocated to the accounts of sales professionals who generated
more than $1,000,000 in gross commissions for either of 1999 or 2000 an amount
equal to the least of the following:
. the amount the sales professional deferred pursuant to the deferred
compensation plan for the applicable year;
. 10% of one-half the sales professional's gross commission; and
. $100,000
The 1999 Company Match was made in the first quarter of 2000 in the form of
an allocation of CB Richard Ellis Services stock fund units. In order to
receive the 1999 Company Match a participant had to (1) sign a three year
covenant not to compete, and (2) direct that a portion of his or her 1999
deferrals equal to 50% of the 1999 Company Match be allocated to CB Richard
Ellis stock fund units. The 1999 Company Match vests 20% a year over a five-
year period. In order to vest for any given year the participant must be
employed by CB Richard Ellis Services on the last day of that year. The first
20% of the 1999 Company Match vested on December 31, 2000. Distributions of
the 1999 Company Match benefits will be made only in shares of stock of CB
Richard Ellis Services, or our Class A common stock after the merger, and only
upon termination of employment. Upon the completion of the merger, the 1999
Company Match will 100% vest and remain credited to a participant's account as
stock fund units.
The 2000 Company Match is identical to the 1999 Company Match except that
(1) the amount of the Match will be allocated to Interest Index Fund II, (2)
the participant must elect to have a portion of his or her 2000 deferrals
equal to 50% of the 2000 Company Match allocated to Interest Index Fund II,
although to the extent these deferrals were invested in the stock fund they
will reduce the 50% allocation requirement, (3) vesting begins December 31,
2001 rather than December 31, 2000 and (4) distributions will be made in the
form of cash rather than the shares of common stock. The completion of the
merger will not result in any acceleration of vesting under the 2000 Company
Match.
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Company Retention Program. The Company Retention Program is also a part of
the deferred compensation plan and was in effect for just one year, 2000 and is
not expected to be in effect in 2001. Under the Retention Program the top 125
sales professionals were allocated CB Richard Ellis stock fund units as
follows:
Stock
Rank Units
---- -----
1-15............................... 5,700
16-75.............................. 4,500
76-125............................. 3,000
The 5,700 and 4,500 share unit awards were conditioned upon the participant
executing a three-year covenant not to compete. Retention Awards vest only if
the participant is continuously employed by CB Richard Ellis Services through
December 31, 2004. If a participant's employment terminates before that date,
he or she forfeits the entire award and is not subject to the covenant not to
compete. Distribution of benefits under the Company Retention Program are made
only in shares of common stock of CB Richard Ellis, or our Class A common stock
after the merger, and only after termination of employment.
Company Recruitment Program. The Company Recruitment Program is a part of
the deferred compensation plan and permits the grant of awards--in the form of
allocations under the deferred compensation plan--up to a total of $3,218,750.
The Company Recruitment Plan was terminated effective April 1, 2001. During the
first ten months of 2000, awards generally were made in the form of CB Richard
Ellis Services stock fund units. After October 31, awards have been made in the
form of allocations to the Insurance Fund. The recruitment awards can only be
made to new hires who are experienced sales professionals and can demonstrate
that either in the current year or the previous year they have had income from
services of more than $100,000. In order to receive a Recruitment Award an
individual must execute a three-year covenant not to compete. Recruitment
awards vest only if the individual is continuously employed by CB Richard Ellis
Services for four years from the date of the award. If a participant's
employment terminates prior to that date, he or she forfeits the entire award
and is not subject to he covenant not to compete.
Amendments in Connection with the Merger. A series of amendments to the
deferred compensation plan will be made in connection with or as a result of
the merger:
. Interest Index Fund II will be established.
. As of the effective time of the merger, each stock fund unit will
thereafter represent the right to receive one share of our Class A common
stock in accordance with the terms and conditions set forth in the
deferred compensation plan instead of one share of CB Richard Ellis
Services.
. Prior to the merger, participants who have CB Richard Ellis stock fund
units that were vested prior to the merger will be required to make one
of the following elections prior to the merger: (1) retain those stock
fund units in their account, provided that this option will only be
available to participants that are employees of CB Richard Ellis Services
at the closing of the merger or are independent contractors of CB Richard
Ellis Services or its subsidiaries in the states of California, New York,
Illinois and Washington at the closing of the merger, or (2) convert the
value of those stock fund units, at $16.00 per unit, into an allocation
to Interest Index Fund II or in the Insurance Fund and select mutual
funds within that fund in each case to measure future gains or losses for
the amount so converted.
. The Rabbi Trust, which is used to hold the insurance contracts for the
Insurance Fund, has been amended effective June 1, 2001 to delete the
provision that makes it irrevocable upon a change of control of CB
Richard Ellis Services and to permit CB Richard Ellis Services to direct
the trustee to take out of the Rabbi Trust any amounts participants elect
to transfer from the Insurance Fund to Interest Index Fund II or, in the
case of designated managers, into stock fund units.
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. After the merger, prior to the earlier of the occurrence of the tenth
anniversary of the merger or 180 days after an underwritten initial
public offering of our Class A common stock in which it becomes listed
for trading on a national securities exchange of are quoted on the Nasdaq
National Market, before a participant may receive a distribution of
shares of our Class A common stock pursuant to the terms of the plan the
participant will be required to sign and deliver a stockholder's
agreement to us. This stockholder's agreement will generally contain all
the terms described in the section of this prospectus titled "Description
of the Offering Documents--Subscription Agreements--Description of Terms
in All Subscription Agreements," except that it will not contain the
terms regarding assignment of proceeds from the merger, representations
and warranties or conditions to subscription.
For 2002 and subsequent years, an employee will have to have income from
salary, bonus and commissions of $150,000, as compared to $100,000 currently,
or more in order to participate in the deferred compensation plan. However, in
the case of a sales professional, if his or her commissions for the prior year
exceeded $150,000, then he or she will be eligible for immediate first dollar
participation in the deferred compensation plan. This change is being made in
response to recent court decisions. For sales professionals whose compensation
in the prior year did not exceed $150,000, participation will be permitted only
with respect to compensation in excess of $150,000 for the deferral year.
Federal Income Tax Consequences of the Amendments. A participant will not
recognize any ordinary income on the conversion of his or her investment in
stock fund units with underlying shares of CB Richard Ellis Services common
stock into an investment in stock fund units with underlying shares of our
Class A common stock, mutual funds under the Insurance Fund or Interest Index
Fund II. Upon the distribution to the participant of shares of our Class A
common stock, the participant will recognize ordinary income equal to the fair
market value of the shares at the time of distribution. Accordingly, a
participant may be subject to tax liability although the participant received
payment of shares, which may lack liquidity, rather than cash. Upon the payment
of cash equal to the value of the participant's Insurance Fund or Interest
Index Fund I or II account, the participant will recognize ordinary income
equal to the cash received.
CB Richard Ellis Services 401(k) Plan
CB Richard Ellis Services maintains the CB Richard Ellis Services 401(k)
Plan, which is a tax qualified retirement plan that we generally refer to as
the 401(k) plan. Generally, an employee of CB Richard Ellis Services is
eligible to participate in the plan if the employee is at least 21 years old.
Contributions. The plan provides for participant contributions as well as
discretionary employer contributions. A participant is allowed to contribute to
the plan from 1% to 15%, in whole percentages, of his or her compensation,
subject to limits imposed by the U.S. Internal Revenue Code. Participant
contributions may be on a pre-tax basis, which we refer to as "pre-tax
contributions" or on an after-tax basis, which we refer to as "after-tax
contributions." In addition, a participant may roll over to the plan his or her
account balance from a retirement plan of a former employer. Each year, CB
Richard Ellis Services determines an amount of employer contributions, if any,
it will contribute to the plan, which we refer to as "CB Richard Ellis Services
contributions," based on the performance and profitability of the consolidated
United States operations of CB Richard Ellis Services. CB Richard Ellis
Services contributions for a year are allocated to participants who are
actively employed on the last day of the plan year in proportion to each
participant's pre-tax contributions for that year, up to 5% of the
participant's compensation. All amounts contributed to the plan, both
participant contributions and CB Richard Ellis Services contributions, are held
in a trust fund. The trust fund is currently administered by an independent
trustee, Vanguard Fiduciary Trust Company. All amounts in the trust fund can
only be used for the benefit of participants. The trustee makes all benefit
payments from the trust fund.
Vesting. A participant is always 100% vested in his or her pre-tax
contributions, after-tax contributions and rollover contributions. A
participant will become vested in CB Richard Ellis Services contributions as
follows: (x) less than 5 years of vested service, 0% and (y) 5 years or more of
vested service, 100%. However, a participant will become 100% vested,
regardless of years of vested service, if (1) the participant reaches age
65
65 while actively employed, (2) the participant was hired after age 65 and
becomes eligible to participate in the plan, (3) the participant dies or
becomes disabled while employed, or (4) the plan is terminated.
Investments. The participant may direct the investment of his or her account
into a number of available investment options under the plan, currently
including an option to invest in CB Richard Ellis Services common stock, and
may change his or her investment elections pursuant to the terms of the plan.
From time to time, CB Richard Ellis Services may change the investment options
under the plan.
Voting Rights. Voting rights in the mutual fund alternatives are not passed
through to participants. However, voting rights with respect to the CB Richard
Ellis Services common stock in the CB Richard Ellis Services Common Stock Fund
are passed through to participants. Currently, the trustee votes shares of
CB Richard Ellis Services common stock in the CB Richard Ellis Services Common
Stock Fund that are not voted by participants in the same proportion as the
shares in the fund for which the trustee did receive participants' directions.
In Service Withdrawals. Generally, a participant is not entitled to a
distribution from the plan during employment. However, during employment, a
participant may take a loan from the plan of up to the lesser of (1) 50% of his
or her vested account balance and (2) $50,000. In addition, after reaching age
59 1/2, a participant may withdraw all or a portion of his or her vested
account balance from the plan. Last, if the participant is less than 59 1/2, he
or she may, in limited circumstances, be eligible for a hardship withdrawal.
However, if a participant holds shares of our Class A common stock in his or
her account after the merger, as described below, he or she will be unable to
take a loan from the plan, or receive a hardship withdrawal, with respect to
those shares.
Distributions. Generally, upon the participant's termination of employment,
distributions from the plan are made in a single lump sum cash payment.
However, if the participant has an account balance in the CB Richard Ellis
Services Common Stock Fund, the participant may receive his or her distribution
of all or a portion of his or her balance in that fund either in shares or in
cash.
Consequences of the Merger. In connection with the merger, each share of CB
Richard Ellis Services common stock currently held by the plan in the CB
Richard Ellis Services Common Stock Fund and credited to participant accounts
will be exchanged for $16.00 in cash, and the plan will be amended to eliminate
the CB Richard Ellis Services Common Stock Fund as an investment option within
the plan. The cash received for the shares of CB Richard Ellis Services common
stock will be available for reinvestment in one or more of the investment
alternatives contained within the plan in accordance with the terms of the
plan, including the new CBRE Holding Common Stock Fund under the circumstance
described below.
New Employer Stock Fund. In connection with the merger, a new CBRE Holding
Common Stock Fund will be created as a plan investment alternative. All of our
active U.S. employees participating in the plan at the time of the merger will
be offered the opportunity to direct the trustee of the plan to purchase for
the CBRE Holding Common Stock Fund shares of our Class A common stock at an
offering price of $16.00 per share. The aggregate number of shares that we will
be offering for purchase by the CBRE Holding Common Stock Fund will be 889,819.
These U.S. employees may use only pre-tax contributions and rollover
contributions for their investments in the CBRE Holding Common Stock Fund, and
no participant may invest more than 50% of his or her entire plan account
balance in the CBRE Holding Common Stock Fund as of June 1, 2001.
401(k) Plan Trustee and Instructions Form. U.S. Trust Company, National
Association has been retained by CB Richard Ellis Services to act as an
independent trustee of the CBRE Holding Common Stock Fund investment
alternative in the plan. In order to acquire shares of our Class A common stock
in this offering using his or her plan account, a participant in the 401(k)
plan at the time of the merger must affirmatively elect, prior to the
subscription deadline, to direct U.S. Trust, as stock fund trustee, to invest a
portion of his or her plan account in CBRE Holding shares after the merger, as
described above. In order to make this election, the participant will be
required to complete and return to U.S. Trust the form of instructions
described in the section of this prospectus titled "Description of the Offering
Documents--401(k) Plan Instructions Form." If
66
an employee has not furnished instructions to the trustee using the appropriate
form prior to the subscription deadline as described above, the employee will
not be able to participate in the offering of shares of our Class A common
stock to be held in the 401(k) plan.
Adequate Consideration Requirement. U.S. Trust will be obligated to follow
the purchase decisions made by participants unless it determines that the
instructions are not consistent with its fiduciary obligations under the
Employee Retirement Income and Security Act of 1974. In this regard, U.S. Trust
will engage an independent financial advisor and will only follow the purchase
instructions if it receives an opinion from this advisor that concludes that
the purchase price is fair to plan participants and constitutes "adequate
consideration" for purposes of ERISA.
Inability to Sell Shares Held in the Plan. In evaluating the offer of
securities to be purchased within the plan, and whether an investment in the
CBRE Holding Common Stock Fund satisfies the prudence requirements required by
ERISA for retirement plan investments, participants should take into account
that following the merger they will not be able to sell these shares and invest
the proceeds in other investments under the plan.
Participants should also take into account that an investment in the CBRE
Holding Common Stock Fund may limit the participant's ability to receive loans
or hardship withdrawals from the plan, since shares of our Class A common stock
held in the CBRE Holding Common Stock Fund may not be used for loans or
hardship withdrawals.
Voting and Plan Distributions. Participants will generally be entitled to
direct U.S. Trust with respect to the voting of shares allocated to their
accounts in the CBRE Holding Common Stock Fund consistent with the current
practice Vanguard has implemented with respect to the CB Richard Ellis Services
Common Stock Fund, described above. To the extent a participant who is invested
in the CBRE Holding Common Stock Fund is entitled to a distribution under the
plan, the participant will have the right either to receive this portion of his
or her distribution in shares of our Class A common stock or to instruct the
trustee to sell the shares and receive the cash proceeds of the sale. If the
trustee cannot otherwise sell the shares prior to an underwritten initial
public offering after which our Class A common stock is listed for trading on a
national securities exchange or is quoted on the Nasdaq National Market, we
will be obligated to purchase these shares at the then fair market value.
Stockholders Agreement. If the participant elects to receive shares of our
Class A common stock upon a distribution prior to the earlier of the occurrence
of the tenth anniversary of the merger or 180 days after an underwritten
initial public offering of our Class A common stock in which it becomes listed
for trading on a national securities exchange or are quoted on the Nasdaq
National Market, if the participant has not previously signed a subscription
agreement, before he or she may receive the distribution of these shares
pursuant to the terms of the plan the participant will be required to sign and
deliver a stockholder's agreement to us. This agreement will contain
substantially the same provisions as the subscription agreements, other than
with respect to the provisions regarding purchasing shares. For a description
of the terms of the subscription agreement, see "Description of the Offering
Documents--Subscription Agreements."
2001 Stock Incentive Plan
The following description of the 2001 CBRE Holding, Inc. Stock Incentive
Plan, which we refer to as our stock incentive plan, is not complete and is
qualified by reference to the full text of the stock incentive plan, which has
been filed as an exhibit to the registration statement. The stock incentive
plan was adopted by our board of directors on June 7, 2001. Both the shares of
CBRE Holding Class A common stock for direct ownership and the options to
acquire CBRE Holding Class A common stock being offered by this prospectus are
being issued or granted, as the case may be, pursuant to the stock incentive
plan.
The stock incentive plan permits the grant of nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock,
restricted stock units and other stock-based awards to our employees, directors
or independent contractors. The number of shares issued or reserved pursuant to
the stock incentive plan, or pursuant to outstanding awards, is subject to
adjustment on account of stock splits, stock dividends and
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other dilutive changes in our Class A common stock. Class A common stock
covered by awards that expire, terminate or lapse will again be available for
option or grant under the stock incentive plan.
Administration. The stock incentive plan is administered by our board of
directors, which may delegate its duties and powers in whole or in part to any
committee of the board of directors. The board of directors has the sole
discretion to determine the employees, directors and independent contractors to
whom awards may be granted under the stock incentive plan and the manner in
which these awards will vest. Options, stock appreciation rights, restricted
stock, restricted stock units and other stock-based awards will be granted by
the board of directors to employees, directors and independent contractors in
the numbers and at the times during the term of the stock incentive plan as the
board of directors determines. The board of directors is authorized to
interpret the stock incentive plan, to establish, amend and rescind any rules
and regulations relating to the stock incentive plan, and to make any other
determinations that it deems necessary or desirable for the administration of
the stock incentive plan. The board of directors may correct any defect, supply
any omission or reconcile any inconsistency in the stock incentive plan in the
manner and to the extent the board of directors deems necessary or desirable.
Options. The board of directors will determine the exercise price for each
option. However, an incentive stock option must generally have an exercise
price that is at least equal to the fair market value of the shares on the date
the option is granted. An optionholder may exercise an option by written notice
and payment of the exercise price (1) in cash or its equivalent, (2) by the
surrender of a number of shares of our common stock already owned by the
optionholder for at least six months, or other period established from time to
time by us in order to avoid adverse accounting treatment applying U.S.
generally accepted accounting principles, with a fair market value equal to the
exercise price, (3) in a combination of cash and shares of our common stock as
qualified by clause (2) above or (4) if a public market for the shares exists,
through the delivery of irrevocable instruments to a broker to sell shares of
our common stock obtained upon exercise of the option and to deliver promptly
to us an amount out of the proceeds of the sale equal to the exercise price for
the shares being purchased. Optionholders may satisfy their income tax
withholding obligation through the withholding of a portion of the shares to be
received upon exercise of the option.
Other Stock-Based Awards. Our board of directors may grant awards of
restricted stock units, shares of Class A common stock and restricted stocks
and awards that are valued in whole or in part by reference to, or are
otherwise based on the fair market value of, shares. The other stock-based
awards will be subject to the terms and conditions established by the board of
directors.
Transferability. Unless otherwise determined by our board of directors,
awards granted under the stock incentive plan are not transferable other than
by will or by the laws of descent and distribution.
Change of Control. In the event of a change of control, (1) any outstanding
awards then held by participants which are unvested or otherwise unexercisable
will automatically be deemed exercisable or otherwise vested, as the case may
be, as of immediately prior to the change of control and (2) our board of
directors may (A) provide for a cash payment to the holder of an award in
consideration for the cancellation of the award and/or (B) provide for
substitute or adjusted awards. The definition of "change of control" is
generally either of the following:
. the sale or disposition, in one or a series of related transactions, of
all, or substantially all, of the assets of CBRE Holding to any "person"
or "group", as defined in Sections 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, other than RCBA Strategic, Freeman Spogli or their
affiliates or any group which includes any of them; or
. any person or group, other than RCBA Strategic, Freeman Spogli or their
affiliates, is or becomes the beneficial owner, directly or indirectly,
of more than 50% of the total voting power of the voting stock of CBRE
Holding, including by way of merger, consolidation or otherwise and the
representatives of RCBA Strategic, Freeman Spogli or their affiliates,
individually or in the aggregate, cease to have the ability to elect a
majority of the board of directors of CBRE Holding; for these purposes, a
member of a group will not be considered to beneficially own the
securities owned by other members of the group.
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Amendment and Termination. Our board of directors may amend, alter or
discontinue the stock incentive plan in any respect at any time, but no
amendment can diminish any of the rights of a participant under any awards
previously granted without his or her consent.
Federal Income Tax Consequences of the Awards under the Stock Incentive
Plan. When a nonqualified stock option is granted, there is no income tax
consequence for the optionholder or us. When a nonqualified stock option is
exercised, in general, the optionholder recognizes compensation equal to the
excess of the fair market value of the shares on the date of exercise over the
exercise price. We are entitled to a deduction equal to the compensation
recognized by the optionholder.
When an incentive stock option is granted, there are no income tax
consequences for the optionholder or us. When an incentive stock option is
exercised, the optionholder does not recognize income and we do not receive a
deduction. The optionholder, however, must treat the excess of the fair market
value of the shares on the date of exercise over the exercise price as an item
of adjustment for purposes of the alternative minimum tax. If the optionholder
disposes of shares after the optionholder has held the shares for at least two
years after the incentive stock option was granted and one year after the
incentive stock option was exercised, then the amount the optionholder receives
upon the disposition over the exercise price is treated as long-term capital
gain to the optionholder. We are not entitled to a deduction. If the
optionholder makes a "disqualifying disposition" of the shares by disposing of
the shares before the shares have been held for the above-described holding
period, then the optionholder generally recognizes compensation income equal to
the excess of (1) the fair market value of the shares on the date the incentive
stock option was exercised, or, if less, the amount received on the
disposition, over (2) the exercise price. We are entitled to a deduction equal
to the income recognized by the optionholder.
When a stock appreciation right is granted, there are no income tax
consequences for the participant or us. When a stock appreciation right is
exercised, in general, the participant recognizes compensation equal to the
cash and/or the fair market value of the shares received upon exercise. We are
entitled to a deduction equal to the compensation recognized by the
participant.
The fair market value of shares of Class A common stock, or the cash, that a
participant receives upon the grant of other stock-based awards over the amount
paid for the other stock-based awards, excluding options, is generally
recognized as compensation by the participant. However, if the other stock-
based awards consist of property subject to a substantial risk of forfeiture,
the amounts generally will not be recognized as ordinary income by the
participant until the substantial risk of forfeiture lapses or until the
participant makes an election under Section 83(b) of the Internal Revenue Code.
We are entitled to a deduction equal to the income recognized by the
participant.
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THE MERGER TRANSACTIONS
Generally
The offerings being made by this prospectus are part of a series of
substantially simultaneous transactions, including the proposed merger of our
wholly-owned subsidiary, BLUM CB Corp., with and into CB Richard Ellis
Services, Inc. pursuant to the amended and restated merger agreement, dated as
of May 31, 2001, among us, CB Richard Ellis Services and BLUM CB Corp. Pursuant
to the merger agreement, and subject to conditions set forth in the merger
agreement, as a result of the merger, each of the outstanding shares of
CB Richard Ellis Services common stock at the time of the merger, other than
shares held by members of the buying group who will receive shares of our Class
B common stock instead, will be converted into the right to receive $16.00 in
cash. As a result of this proposed merger, CB Richard Ellis Services would
become our direct, wholly-owned subsidiary and the common stock of CB Richard
Ellis Services would be delisted from the New York Stock Exchange. The
completion of these offerings of our Class A common stock are conditioned upon
the closing of the merger.
Pursuant to an amended and restated contribution and voting agreement,
immediately prior to the merger each of the members of the buying group will
contribute to us all of the shares of CB Richard Ellis Services common stock
that he or it directly owns. Each of these shares contributed to us will be
cancelled as a result of the merger. We will issue one share of our Class B
common stock in exchange for each share of CB Richard Ellis Services common
stock contributed to us. This will result in the issuance to the buying group
of an aggregate of 8,052,087 shares of our Class B common stock in exchange for
these contributions. Also pursuant to the contribution and voting agreement,
the BLUM Funds have agreed to purchase for cash immediately prior to the merger
a minimum of 2,553,879 shares of our Class B common stock at $16.00 per share.
In addition, the BLUM Funds have agreed to purchase for $16.00 per share in
cash an additional number of shares of our Class B common stock for $16.00 per
share equal to (1) 3,236,639 shares minus (2) the number of shares of our Class
A common stock and stock fund units subscribed for in the offerings made by
this prospectus plus (3) the aggregate amount of full-recourse notes delivered
by designated managers in the offerings divided by $16.00. The number of shares
purchased by the BLUM Funds will be reduced by 241,885 shares, which is the sum
of the 10 shares of CBRE Holding common stock initially owned by RCBA Strategic
and the 241,875 shares of CBRE Holding common stock purchased by RCBA Strategic
for $16.00 per share in connection with the closing of the sale of 11 1/4%
senior subordinated notes by BLUM CB Corp. as described below. The proceeds
from the sale of those shares to RCBA Strategic were contributed to BLUM CB
Corp., which deposited the proceeds in an escrow account for release when the
merger is completed. If the offerings to employees are fully subscribed and
none of our designated managers elects to deliver a full-recourse note as
payment for the subscribed shares, the BLUM Funds will have no obligation to
purchase additional shares and they will hold approximately 39.3% of our
outstanding Class A and Class B common stock and stock fund units. The amount
of equity contributed by the BLUM Funds to us may be increased although there
is no obligation to do so.
In connection with the merger and related transactions, we will issue and
sell to DLJ Investment Funding, Inc., $65.0 million in aggregate principal
amount of our 16% Senior Notes due 2011 and 521,847 shares of our Class A
common stock for an aggregate price of $65.0 million. A portion of the 16%
senior notes and related Class A common stock may be purchased by persons other
than DLJ Investment Funding, Inc. Also, in connection with the merger,
CB Richard Ellis Services will assume $229 million in aggregate principal
amount of 11 1/4% Senior Subordinated Notes due 2011 of BLUM CB Corp., which
were issued and sold for approximately $225.6 million on June 7, 2001. The net
proceeds from the sale of those notes by BLUM CB Corp. are currently being held
in an escrow account and will be released when the merger is completed. In
addition, CB Richard Ellis Services will enter into a new senior secured credit
agreement with CSFB and other leaders under which CB Richard Ellis Services
will borrow up to $225.0 million in term loans. This credit agreement will also
include a $100.0 million revolving credit facility, which is intended to
finance our working capital requirements after December 31, 2000, and a portion
of which will be drawn upon at the time of the merger. For additional
information regarding the indebtedness we will incur in connection with the
merger, you should read the section of this prospectus titled "Description of
Indebtedness."
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The proceeds from the sale of our senior notes and related Class A common
stock, the offerings of our Class A common stock and the purchase of our Class
B common stock by the BLUM Funds, together with borrowings under the credit
agreement and the proceeds from the 11 1/4% senior subordinated notes, will be
used to pay the holders of CB Richard Ellis Services common stock immediately
prior to the merger, other than the members of the buying group, consideration
of $16.00 per share in the merger, to refinance substantially all of CB Richard
Ellis Services' existing indebtedness, to pay fees and expenses associated with
the merger and for working capital and other general corporate purposes. For
additional information regarding the use of proceeds received in the offerings,
you should read the section of this prospectus titled "Use of Proceeds."
Also in connection with the merger, we, each of the members of the buying
group and DLJ Investment Funding, Inc. and the other purchasers of our senior
notes and the related Class A common stock will enter into a securityholders'
agreement, which will contain agreements among us, the holders of the Class B
common stock and DLJ Investment Funding, Inc. and the other purchasers of our
senior notes and the related Class A common stock, including voting, transfer,
restrictions, participation rights, registration rights, and a right of first
offer in favor of the BLUM Funds.
The following summarizes the merger agreement, the securityholders'
agreement and the contribution and voting agreement, each of which is included
as an exhibit to the registration statement filed with the SEC of which this
prospectus forms a part. You should carefully read each of the agreements in
their entirety and not rely solely upon the description of the agreements
provided below.
Merger Agreement
The merger agreement provides that BLUM CB, a Delaware corporation wholly-
owned by us, will merge into CB Richard Ellis Services. Following the
completion of the merger, BLUM CB will cease to exist as a separate entity and
CB Richard Ellis Services will continue as the surviving corporation and as our
wholly-owned subsidiary.
Effective Time. The merger will become effective upon the filing of a
certificate of merger with the Secretary of State of Delaware or at such later
time as specified in the certificate of merger. We refer to this time as the
effective time. We expect this filing to occur as soon as practicable after the
adoption of the merger agreement by the stockholders of CB Richard Ellis
Services at a special meeting and the satisfaction or waiver of the other
conditions to the merger as set forth in the merger agreement.
Merger Consideration. At the effective time of the merger, each share of CB
Richard Ellis Services common stock outstanding immediately prior to the
effective time will be cancelled and automatically converted into the right to
receive $16.00 in cash, without interest or other payment, with the following
exceptions:
. treasury shares, shares of CB Richard Ellis Services common stock owned
by us or BLUM CB, which will include the shares contributed to us by the
buying group immediately prior to the merger, and shares of CB Richard
Ellis Services common stock owned by any of its subsidiaries will be
cancelled without any payment; and
. shares held by stockholders who have perfected their dissenters' rights
will be subject to appraisal in accordance with Delaware law.
At the effective time of the merger, each share of the common stock of BLUM
CB issued and outstanding immediately before the effective time will be
converted into the right to receive one share of common stock of CB Richard
Ellis Services.
Pursuant to the contribution and voting agreement which is described below,
each share of CB Richard Ellis Services common stock held by a member of the
buying group will be contributed by them to us immediately prior to the merger
in consideration for the issuance by us of an identical number of shares of our
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Class B common stock. Each of the shares of the buying group contributed to us
will be cancelled in connection with the merger without payment.
Cancellation of Options in the Merger. At the effective time of the merger,
each holder of an option to purchase shares of CB Richard Ellis Services common
stock outstanding under any of its stock option or compensation plans or
arrangements, whether or not vested, will have the right to have the option
canceled and in exchange CB Richard Ellis Services will pay to each holder of a
canceled option, as soon as practicable following the effective time, an amount
per share that is subject to the option, equal to the greater of (A) the amount
by which $16.00 exceeds the exercise price of the option, if any, and (B)
$1.00, reduced in each case by applicable tax withholding.
Each holder of an option that does not elect to receive the consideration
described in the previous sentence will continue to hold his or her options to
acquire CB Richard Ellis Services common stock after the merger. However, after
the merger, CB Richard Ellis Services will be our wholly-owned subsidiary and
its common stock will be delisted from the New York Stock Exchange and
deregistered under the Securities Exchange Act of 1934. Accordingly, if any
holder exercised his or her options after the merger, the holder would receive
common stock of our subsidiary, which common stock would be difficult, if not
impossible, to sell.
CB Richard Ellis Services Deferred Compensation Plan. At the effective time
of the merger, the CB Richard Ellis Services deferred compensation plan will be
amended so that each stock fund unit will represent the right to receive one
share of our Class A common stock on a future distribution date as described in
the plan instead of one share of CB Richard Ellis Services common stock. Each
of our U.S. employees and each of our independent contractors in the states of
California, New York, Illinois or Washington who has stock fund units credited
to his or her account that have vested prior to the merger will be required,
prior to the merger, to make one of the following elections with respect to
those stock fund units:
. convert the value of those stock fund units, based upon a value of
$16.00 per stock fund unit, into any of the insurance mutual fund or
interest index fund alternatives that are available under the deferred
compensation plan as of the effective time of the merger, or
. continue to hold those stock fund units in his or her account under the
deferred compensation plan.
Every other participant in the deferred compensation plan who has stock fund
units credited to his or her account that have vested prior to the merger must
convert the value of those stock fund units, based upon a value of $16.00 per
stock fund unit, into any of the insurance mutual fund or interest index fund
alternatives that are available under the deferred compensation plan.
All stock fund units that have not vested prior to the time of the merger,
including any stock fund units that will vest as a result of the merger, will
automatically remain in the deferred compensation plan after the merger and
represent the right to receive shares of our Class A common stock on future
distribution dates as described in the plan.
CB Richard Ellis Services 401(k) Plan. At the effective time of the merger,
each share of CB Richard Ellis Services common stock credited to an employee
account in the CB Richard Ellis Services 401(k) plan will be exchanged for
$16.00 in cash. At the effective time of the merger, provided that the
registration statement of which this prospectus forms a part has been declared
effective by the SEC, each of our U.S. employees with an account balance in the
CB Richard Ellis Services 401(k) plan may then elect to invest, pursuant to the
terms of the 401(k) plan, in shares of our Class A common stock based on a
purchase price of $16.00 per share. However, the aggregate number of shares of
our Class A common stock that will be made available for purchase will be
889,819 shares. In the event that we receive requests to purchase an aggregate
number of shares of our Class A common stock in excess of the amount described
above, the amount subscribed to by each participant in the offerings will be
reduced pro rata based on the number of shares of our Class A common stock that
each participant initially requested to purchase. In any event, no participant
will be entitled to have greater than 50% of his or her total account balance
in the CB Richard Ellis Services 401(k) plan
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invested in CBRE Holding shares as of the effective time of the merger, with
all other investments in his or her 401(k) plan account being valued as of June
1, 2001.
Officers, Directors and Governing Documents. Upon and after the effective
time of the merger, the directors of BLUM CB will become the directors of CB
Richard Ellis Services and the current officers of CB Richard Ellis Services
will remain the officers of CB Richard Ellis Services in each case until their
successors are duly elected or appointed and qualified. The certificate of
incorporation and bylaws of CB Richard Ellis Services in effect immediately
prior to the effective time will remain the certificate of incorporation and
bylaws of CB Richard Ellis Services, each until amended, except that the
certificate of incorporation will be amended in connection with the merger to
create a new class of preferred stock that will be held by CBRE Holding, Inc.
after the merger.
Conditions to the Merger. The obligations of CB Richard Ellis Services and
us to complete the merger are subject to the satisfaction or, if legal, waiver
of each of the following conditions:
. stockholders who hold a majority of the outstanding common stock of CB
Richard Ellis Services must adopt the merger agreement;
. stockholders who hold at least 66 2/3% of the shares of outstanding
common stock of CB Richard Ellis Services not owned by the members of the
buying group or their affiliates must adopt the merger agreement;
. no governmental entity can have enacted any law or taken any other action
that restrains, enjoins or otherwise prohibits the merger or makes it
illegal; and
. the registration statement, of which this prospectus forms a part, must
have been declared effective by the Securities and Exchange Commission
and continue to be effective.
The obligation of CB Richard Ellis Services to complete the merger is
subject to the satisfaction or waiver of each of the following additional
conditions:
. we and BLUM CB must have performed in all material respects all of our
and their obligations under the merger agreement required to be performed
at or before the effective time of the merger;
. the representations and warranties made by BLUM CB and us in the merger
agreement must have been true and correct in all material respects when
made and at and as of the effective time of the merger;
. CB Richard Ellis Services must have received a certificate signed by the
president or chief executive officer of each of BLUM CB and us as to
compliance with the conditions specified in the two preceding paragraphs;
. we and BLUM CB must have obtained or made all consents, approvals,
actions, orders, authorizations, registrations, declarations,
announcements and filings with any governmental entity that are required
in connection with the merger and the other transactions contemplated by
the merger agreement and that, if not obtained, would make the merger
illegal or would be reasonably likely, individually or in the aggregate,
to prevent or materially impair the ability of BLUM CB and us to complete
the merger transactions or to have a material adverse effect on CB
Richard Ellis Services in the merger; and
. the special committee must have received a letter addressed to it from a
valuation firm as to the solvency of CB Richard Ellis Services and its
subsidiaries after giving effect to the merger, the financing
arrangements contemplated by BLUM CB with respect to the merger and the
other transactions contemplated by the merger agreement.
Our obligation to complete the merger is subject to the satisfaction or
waiver of each of the following additional conditions:
. CB Richard Ellis Services must have performed in all material respects
its obligations contained in the merger agreement required to be
performed at or before the effective time of the merger;
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. the representations and warranties made by CB Richard Ellis Services in
the merger agreement must have been true and correct in all material
respects when made and at and as of the effective time of the merger;
. we must have received a certificate signed by the chief executive officer
or chief financial officer of CB Richard Ellis Services as to its
compliance with the conditions specified in the two preceding paragraphs;
. CB Richard Ellis Services must have obtained or made all consents,
approvals, actions, orders, authorizations, registrations, declarations,
announcements and filings with any governmental entity that are required
in connection with the merger and the other transactions contemplated by
the merger agreement and that, if not obtained, would make the merger
illegal or would be reasonably likely to have, individually or in the
aggregate, a material adverse effect on CB Richard Ellis Services, unless
the failure of this condition to be satisfied is due to willful breach by
either of the acquisition companies of any agreement, including the
agreements related to our financing arrangements for the merger and the
other transactions contemplated by the merger agreement;
. the proceeds from the issuance and sale of the senior subordinated notes
must have been released to BLUM CB Corp. from the escrow account into
which they were deposited in connection with the closing of the offering
of the senior subordinated notes, and the funding contemplated by the
commitment letters for our financing of the merger and the other
transactions contemplated by the merger agreement must have been
obtained, or suitable alternative financing must have been obtained; and
. consent must have been obtained from the holders of the portion of CB
Richard Ellis Services' 8 7/8% senior subordinated notes outstanding
required to amend those notes' indenture to permit the merger and the
other transactions contemplated by the merger agreement. As of June 8,
2001, a majority of the holders of the 8 7/8% senior subordinated notes
had consented to the amendments to the Indenture and had tendered their
notes.
The merger agreement defines a material adverse effect on CB Richard Ellis
Services as any material adverse effect on (1) the business, assets,
liabilities, financial condition or results of operations of CB Richard Ellis
Services and its subsidiaries, taken as a whole, or (2) the ability of CB
Richard Ellis Services to perform its obligations under the merger agreement or
the other agreements and transactions contemplated by the merger agreement, in
each case other than changes or developments resulting from global general
economic or political conditions, conditions generally affecting the industry
in which CB Richard Ellis Services and its subsidiaries operate, changes in
U.S. or global financial markets or conditions, any generally applicable change
in law or GAAP or interpretation of law or GAAP or the announcement of the
merger agreement or the transactions contemplated by it or CB Richard Ellis
Services' performance of its obligations under the merger agreement and
compliance with the covenants in the merger agreement.
Securityholders' Agreement
Pursuant to the contribution and voting agreement described below, we and
each member of the buying group have agreed to enter into a securityholders'
agreement upon the closing of the merger. CB Richard Ellis Services and DLJ
Investment Funding, Inc. and other purchasers of our senior notes that hold
shares of our Class A common stock will also be parties to the securityholders'
agreement.
Limitations on Transfer
Each stockholder party to the securityholders' agreement will agree not to
sell any shares of our common stock or warrants to acquire our common stock,
collectively, the "restricted securities," unless (1) the transfer is pursuant
to an effective registration statement under the Securities Act and has been
registered under all applicable state securities or "blue sky" laws or (2) the
party has furnished us with an acceptable written opinion of counsel stating
that no registration is required because of the availability of an exemption
from registration under the Securities Act and all applicable state securities
or "blue sky" laws.
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In addition, pursuant to the securityholders' agreement, DLJ Investment
Funding, Inc. and the other purchasers of our senior notes and the related
Class A common stock and the members of the buying group other than RCBA
Strategic and its affiliates will agree that, until the earlier of ten years
from the date the securityholders' agreement is signed or the date of an
underwritten initial public offering in which our shares become listed on a
national securities exchange or the Nasdaq National Market, which period we
refer to as the "restricted period," not to sell any restricted securities
except:
. to their respective affiliates;
. in the case of an individual who is a party to this agreement, to his or
her spouse or direct lineal descendants, including adopted children, or
antecedents;
. in the case of an individual who is a party to this agreement, to a
charitable remainder trust or trusts, in each case the current
beneficiaries of which, or to a corporation or partnership, the
stockholders or limited or general partners of which, include only the
transferor, the transferor's spouse or the transferor's direct lineal
descendants, including adopted children or antecedents;
. in the case of an individual who is a party to this agreement, to the
executor, administrator, testamentary trustee, legatee or beneficiary of
any deceased transferor holding restricted securities;
. in the case of Freeman Spogli, beginning on April 12, 2003, on a pro rata
basis to its partners;
. in the case of a transferee of Freeman Spogli pursuant to the previous
bullet point that is a corporation, partnership, limited liability
company, trust or other entity, on a pro rata basis without payment of
consideration, to its shareholders, partners, members, beneficiaries or
other entity owners, as the case may be;
. in the case of Freeman Spogli, The Koll Holding Company and Frederic
Malek, beginning three years from the closing date of the merger, after
complying with the right of first offer provision described below;
. by DLJ Investment Funding, Inc. and the other purchasers of our senior
notes and the related Class A common stock, in connection with transfers
of our 16% Senior Notes due 2011 to a permitted transferee; and
. transfers made in connection with the tag-along rights and drag-along
rights described below.
In order for any of the sales described above to be permitted, each recipient
of restricted securities must first execute an assumption agreement whereby it
will become a party to the securityholders' agreement and assume and become
entitled to specified rights and obligations in the securityholders' agreement
as described in the following paragraph.
With respect to any person who acquires any restricted securities from any
securityholder in compliance with the terms of the securityholders' agreement,
the transferee will become subject to the following provisions of the
securityholders' agreement, depending upon the identity of the transferor:
. in the case of any transfer from the BLUM Funds, (A) if the transferee
acquires a majority of our common stock beneficially owned by a BLUM
Fund, that BLUM Fund may assign to the transferee all of its rights and
obligations under the agreement or (B) if the transferee acquires less
than a majority of our common stock beneficially owned by that BLUM Fund,
the transferee generally will assume and be entitled to all of the rights
and obligations of the BLUM Funds described in the section titled
"Registration Rights" below;
. in the case of an assignment by a BLUM Fund of its rights pursuant to a
right of first offer, as described below, the assignee or assignees
generally will assume and be entitled to all of the rights and
obligations of the BLUM Funds described in the section titled
"Registration Rights" below;
. in the case of any transfer from Freeman Spogli, (A) the transferee will
assume all of the rights and obligations of Freeman Spogli, other than
the right to designate any member of CBRE Holding's board
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of directors, the "Freeman Spogli Consent Rights" described below or the
right to have one or more observers at meetings of the board of directors
of CBRE Holding and (B) in addition, if the transferee acquires a majority
of our common stock beneficially owned by Freeman Spogli at the time of
the transfer and following the acquisition the transferee beneficially
owns at least 10% of our outstanding common stock, Freeman Spogli may
assign to the person all of its rights and obligations under the
agreement; and
. in the case of any transfer from any other party to the securityholders
agreement, the new transferee generally will assume and be entitled to
all of the rights and obligations of the transferor under this
agreement.
Right of First Offer. Beginning three years from the closing date of the
merger, each purchaser of the senior notes and each of Freeman Spogli, The Koll
Holding Company and Frederic Malek will be able to transfer all or any portion
of its or his restricted securities to a qualified purchaser. However, prior to
any transfer to a qualified purchaser, the transferring securityholder must
first offer to sell all or, with the consent of the transferring
securityholder, a portion of these restricted securities to RCBA Strategic or
its assignee at the price and upon the other terms indicated to RCBA Strategic
by the transferring securityholder. If RCBA Strategic elects not to buy all of
the restricted securities on these terms, the transferring securityholder will
be able to transfer the shares to a qualified purchaser for a limited period of
time at a purchase price equal to or greater than the price offered to RCBA
Strategic and on other terms that are no more favorable in any material respect
than the terms initially offered to RCBA Strategic.
Under the securityholders' agreement, the term "qualified purchaser" refers
to any person to whom a securityholder wishes to transfer its or his restricted
securities, as long as this person is approved by RCBA Strategic, which
approval will not be unreasonably withheld. If a proposed qualified purchaser
is a nationally-recognized private equity sponsor or institutional equity
investor, RCBA Strategic may not withhold its consent unless RCBA Strategic's
decision results from its direct experience with this person in connection with
another actual or proposed transaction.
Co-Sale Right. Prior to the date of an underwritten initial public offering
in which our shares become listed on a national securities exchange or the
Nasdaq National Market, if RCBA Strategic and its affiliates propose to
transfer a portion of their common stock to any third party, other than in a
public offering, each purchaser of the senior notes and related Class A common
stock and the members of the buying group generally will have the right under
the securityholders' agreement to require the proposed transferee or acquiring
person to purchase from it or him the same proportion of its or his shares of
common stock as is being purchased from RCBA Strategic and its affiliates at
the same price per share and generally upon the same terms and conditions as
apply to RCBA Strategic and its affiliates.
Required Sale. If RCBA Strategic and its affiliates agree to transfer to a
third party, other than in a public offering, a majority of the shares of our
common stock beneficially owned by RCBA Strategic and its affiliates at the
time of the transfer, then under the securityholders' agreement each purchaser
of the senior notes and related Class A common stock and the members of the
buying group may be required to transfer to the third party the same proportion
of its or his restricted securities as is being transferred by RCBA Strategic
and its affiliates at the same price and generally upon the same terms and
conditions as apply to RCBA Strategic and its affiliates.
In addition, if RCBA Strategic approves any merger, consolidation,
amalgamation or other business combination involving us or any of our
subsidiaries or the sale of all or substantially all of our assets, then each
of the members of the buying group will agree to vote all shares of our Class B
common stock held by him or it or his or its affiliates to approve the
transaction and not to exercise any appraisal or dissenters' rights available
to it or him under any rule, regulation, statute, agreement or otherwise.
Participation Rights. Except for the specified exceptions listed below, we
will agree under the securityholders' agreement not to issue any of our equity
securities to any person unless, prior to the issuance,
76
we notify each of the members of the buying group and grant to it or one of
its affiliates the right to subscribe for and purchase a pro rata share of the
equity securities being issued at the same price and upon the same terms and
conditions as apply to all other subscribers. The specified exceptions to the
participation rights include issuances of equity securities under the
following circumstances:
. upon the exchange, exercise or conversion of other equity securities;
. in connection with any stock split, stock dividend or recapitalization
of us, as long as it is fully proportionate for each class of affected
equity securities and entails equal treatment for all shares or units of
the affected class;
. pursuant to the acquisition by us or our subsidiaries of another person
or a material portion of its assets, by merger, purchase of assets or
otherwise;
. to employees, officers, directors or independent contractors of us or
our subsidiaries;
. in connection with a public offering; or
. to customers, venders, lenders, and other non-equity financing sources,
lessors of equipment and other providers of goods or services to us or
our subsidiaries.
Market "Stand-Off." Pursuant to the securityholders' agreement, in
connection with an underwritten initial public offering in which our shares
become listed on a national securities exchange or the Nasdaq National Market,
if all of the securityholders that are parties to the securityholders'
agreement that hold at least 2% of the outstanding shares of our common stock
agree to the same restrictions, each of the securityholders that is a party to
the securityholders' agreement are not permitted to sell, transfer or engage
in a similar transaction with respect to any of our securities for a period
specified by the representative of the underwriters, which period may not
exceed 180 days after the registration statement regarding the offering is
declared effective.
Registration Rights
Demand Registration Rights. Subject to the terms and conditions described
in the securityholder's agreement, if we receive a written demand from the
holders of at least 25% of the then outstanding shares of our common stock
held by the BLUM Funds and their transferees, the holders of at least 25% of
the then outstanding shares of our common stock held by Freeman Spogli and its
transferees or the holders of at least 25% of the then outstanding shares of
our common stock held by DLJ Investment Funding, Inc. and the other purchasers
of our senior notes and the related Class A common stock and their
transferees, then we will agree to use our best efforts to effect, as soon as
practicable, the registration under the Securities Act of all our common stock
requested to be registered in accordance with the terms of the securityholders
agreement together with any of our other securities entitled to be included
under the registration.
However, we will not be required to effect a demand registration under the
securityholders' agreement:
. prior to 180 days after the effective date of a registration statement
pertaining to an underwritten initial public offering in which shares
become listed on a national securities exchange or the Nasdaq National
Market;
. requested by the BLUM Funds and their transferees after we have effected
six demand registrations requested by the BLUM Funds and their
transferees and each of these registrations has been declared or ordered
effective;
. requested by Freeman Spogli and its transferees after we have effected
three registrations requested by Freeman Spogli and its transferees and
each of these registrations has been declared or ordered effective;
. requested by DLJ Investment Funding, Inc. and the other purchasers of
our senior notes and the related Class A common stock and their
transferees after we have effected one registration requested by
77
DLJ Investment Funding, Inc. and the other purchasers of our senior notes
and the related Class A common stock and their transferees and this
registration has been declared or ordered effective;
. if the anticipated aggregate gross proceeds to be received by the
parties requesting the registration are less than $2,000,000;
. if we notify in good faith the parties requesting the registration that
we intend to make another public offering within ninety days of the
demand request; or
. if we furnish to the parties requesting the registration a certificate
signed by the chairman of our board of directors stating that in the
good faith judgment of our board of directors, it would be seriously
detrimental to us for the registration to be effected at the time, in
which event we will have the right to defer the filing for ninety days,
although we will not be able to defer filings in this fashion more than
an aggregate of ninety days in any twelve month period.
In any underwritten offering under a demand registration, if the managing
underwriter advises us that marketing factors require a limitation of the
number of shares to be underwritten because it likely to have an adverse effect
on the price, timing or the distribution of the shares to be offered, then the
number of shares that may be included in the underwriting will be allocated
first among the parties who demanded the registration on a pro rata basis and
second to the extent all registrable shares requested to be included in the
underwriting by the parties who demanded the registration have been included,
among the remaining securityholders requesting inclusion of registrable shares
in the underwritten offering on a pro rata basis.
Piggyback Registrations Rights. In the securityholders' agreement, each
securityholder party to the agreement and its transferees will be entitled to
request that we include all or a portion of his or its shares in any
registration statement for purposes of a public offering of our securities, but
excluding the following types of offerings:
. registration statements relating to employee benefit plans or with
respect to corporate reorganizations or other transactions under Rule
145; and
. any registration statement pertaining to an underwritten initial public
offering in which shares become listed on a national securities exchange
or the Nasdaq National Market.
In an underwritten offering in which one or more securityholder parties to
the agreement exercise their piggyback registration rights, if the managing
underwriter advises us that marketing factors require a limitation of the
number of shares to be underwritten because it likely to have an adverse effect
on the price, timing or the distribution of the shares to be offered, then the
number of shares that may be included in the underwriting will be allocated
first to us and second to the securityholders on a pro rata basis. However, no
reduction will be allowed to reduce the securities being offered by us for our
own account to be included in the registration and underwriting or reduce the
amount of securities of the selling securityholders included in the
registration below 25% of the total amount of securities included in the
registration, unless the offering does not include shares of any other selling
securityholders, in which event any or all of the registrable shares may be
excluded in accordance with the immediately preceding sentence.
Expenses of Registration. All registration expenses incurred in connection
with a registered offering pursuant to either demand or piggyback registration
rights generally will be borne by us, except for underwriting discounts,
selling commissions and transfer taxes, which will be borne by the holders of
the securities being registered on a pro rata basis.
Indemnification. In connection with a registered offering pursuant to either
demand or piggyback registration rights, we will agree to indemnify and hold
harmless each of the securityholders that is party to the securityholders'
agreement and participates in the offering against any losses, claims, damages,
liabilities or expenses to which it or he may become subject under the
Securities Act of 1933, the Securities Exchange Act of 1934 or other federal or
state law for any untrue statements, material omissions or other violations we
make in connection with any registered offering.
78
Expiration. Each party's demand and piggyback registration rights pursuant
to the securityholders' agreement will expire if all of the following are
satisfied:
. we have completed an underwritten initial public offering in which our
shares become listed on a national securities exchange or the Nasdaq
National Market and subject to the provisions of the Securities Exchange
Act of 1934;
. the party, together with its affiliates, partners and former partners
holds less than 2% of our outstanding common stock; and
. all our common stock held by the party, and its affiliates, partners and
former partners may be sold under Rule 144 of the Securities Act of 1933
during any ninety day period.
Governance
Composition of Board of Directors and Committees. Pursuant to the terms of
the securityholders' agreement, prior to an underwritten initial public
offering in which our shares become listed on a national securities exchange or
the Nasdaq National Market, each member of the buying group will agree to vote
all of his or its beneficially owned shares of our Class B common stock to
elect the following representatives to our board of directors:
. between three and six directors designated by RCBA Strategic, with the
actual number to be determined by RCBA Strategic in its discretion;
. one director designated by Blum Strategic Partners II;
. one director designated by Freeman Spogli;
. Raymond Wirta, for so long as he is employed by us or, if he is no
longer employed by us, our chief executive officer at that time;
. Brett White, for so long as he is employed by us or, if he is no longer
employed by us, our Chairman of the Americas at that time, but RCBA
Strategic may elect to reduce the size of the board of directors by one
director if he is no longer our Chairman of the Americas; and
. one director who is a real estate brokerage employee of ours, who will
be elected immediately after the closing of the merger and will remain a
director for so long as a majority of the board of directors agree.
Each of the designation rights described above is subject to the following
limitations:
. the director designation rights of RCBA Strategic will be reduced to two
designees, or one designee if there is not a real estate brokerage
employee serving as a member of the board, if the BLUM Funds and their
affiliates beneficially own common stock representing less than 22.5% of
our outstanding common stock, to one designee if there is not a real
estate brokerage employee serving as a member of the board, if the BLUM
Funds and their affiliates beneficially own common stock representing
less than 15% of our outstanding common stock and to no designee if the
BLUM Funds and their affiliates beneficially own common stock
representing less than 7.5% of our outstanding common stock;
. the director designation rights of Blum Strategic will be reduced to
zero if RCBA Strategic is entitled to designate only one or zero
directors; and
. the director designation right of Freeman Spogli will reduce to zero if
Freeman Spogli and its affiliates, collectively, beneficially own common
stock representing less than 7.5% of our outstanding common stock.
Also, prior to an underwritten initial public offering in which our shares
become listed on a national securities exchange or the Nasdaq National Market,
each committee of our board of directors will include at least one director or
observer designated by RCBA Strategic and one director or observer designated
by Freeman Spogli.
79
Following an underwritten initial public offering in which our shares become
listed on a national securities exchange or the Nasdaq National Market:
. RCBA Strategic will be entitled to nominate a percentage of the total
number of directors on our board of directors that is equivalent to the
percentage of our outstanding common stock beneficially owned by the
BLUM Funds and their affiliates; and
. Freeman Spogli will be entitled to nominate one director to our board of
directors as long as they own in the aggregate at least 7.5% of our
outstanding common stock.
In connection with each of our annual or special meetings of stockholders at
which our directors are to be elected, we will (1) nominate and recommend to
stockholders the individuals nominated in the bullet points above for election
or re-election as part of the management slate of directors and (2) provide the
same type of support for the election of these individuals as directors as we
provide to other persons standing for election as our directors as part of the
management slate. In addition, each member of the buying group has agreed that
he or it will vote all shares of common stock owned by him or it in favor of
the election or re-election of these individuals.
Also pursuant to the securityholders' agreement, the board of directors of
CB Richard Ellis Services will at all times following the merger consist of the
same persons as the board of directors of CBRE Holding.
Board Observers. Prior to an underwritten initial public offering in which
our shares become listed on a national securities exchange or the Nasdaq
National Market, Freeman Spogli will be entitled to have two non-voting
observers, in addition to the director designated above, at all meetings of our
board of directors for so long as Freeman Spogli owns at least 7.5% of our
outstanding common stock. Similarly, prior to an underwritten initial public
offering in which our shares become listed on a national securities exchange or
the Nasdaq National Market, as long as is necessary for DLJ Investment Funding,
Inc. to remain qualified as a "venture capital operating company" under
applicable federal regulations, DLJ Investment Funding, Inc. or its affiliates
will be entitled to one non-voting observer at all meetings of our board of
directors for so long as they own at least 1.0% of our outstanding common stock
in the aggregate or a majority in principal amount of the senior notes.
Advisors. At the reasonable request of our board of directors or our
management, Frederic Malek and/or Donald Koll will provide advice with respect
to our industry, business and operations and our board of directors or our
management, as applicable, will consider this advice in good faith. In
connection with providing this requested advice, we will reimburse Frederic
Malek and Donald Koll for any reasonable out-of-pocket expenses that they
incur.
Voting of Capital Stock. Prior to an underwritten initial public offering in
which our shares become listed on a national securities exchange or the Nasdaq
National Market, each member of the buying group other than the BLUM Funds
agrees to vote at any stockholders meeting or in any written consent all of the
shares of our voting capital stock owned or held of record by it, in same the
manner as RCBA Strategic votes the shares of our voting capital stock
beneficially owned by it, except with respect to the following actions by us or
any of our subsidiaries:
. any transaction between the BLUM Funds or their affiliates and us or any
of our subsidiaries, other than a transaction (1) with another portfolio
company of the BLUM Funds that has been negotiated on arms-length terms
in the ordinary course of business between the managements of us or any
of our subsidiaries and the portfolio company, (2) with respect to which
the securityholders may exercise their participation rights under the
securityholders' agreement or (3) specifically contemplated by the
merger agreement; or
. any amendment to our certificate of incorporation or bylaws that
adversely affects the securityholder relative to the BLUM Funds, other
than generally (a) an increase in our authorized capital stock or
(b) amendments made in connection with any reorganization of us effected
to facilitate (1) an initial public offering or (2) the acquisition of
us by merger or consolidation.
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For so long as the paragraph immediately above applies, each member of the
buying group other than the BLUM Funds will grant to RCBA Strategic an
irrevocable proxy, coupled with an interest, to vote all of the shares of our
voting capital stock owned by the grantor of the proxy.
General Consent Rights. Prior to an underwritten initial public offering in
which our shares become listed on a national securities exchange or the Nasdaq
National Market, under the securityholders' agreement, neither we nor any of
our subsidiaries will be allowed to take any of the following actions without
the prior affirmative vote or written consent of (1) a majority of our
directors and (2) a majority of our directors that are not designated by RCBA
Strategic or Blum Strategic Partners II:
. any of the transactions described in the two bullet points in the
section above titled "Voting of Capital Stock" above; or
. the repurchase or redemption of, the declaration or payment of a
dividend with respect to, or the making of a distribution upon, any
shares of our capital stock beneficially owned by the BLUM Funds or
their affiliates unless (a) the repurchase, redemption, dividend or
distribution is made pro rata among all holders of that class of capital
stock, or in the case of a repurchase or redemption, each of the
securityholder parties other than the BLUM Funds and their affiliates
are given a proportionate right to participate in the repurchase or
redemption, to the extent they own shares of that class of capital stock
or (b) if the capital stock is not our common stock, the repurchase,
redemption or dividend is required by the terms of that capital stock.
Consent Rights of the Director Designated by Freeman Spogli. Prior to an
underwritten initial public offering in which our shares become listed on a
national securities exchange or the Nasdaq National Market, for so long as
Freeman Spogli will be entitled to designate a member of our board of
directors, neither we nor any of our subsidiaries will be able to take any of
the following actions without the prior affirmative vote or written consent of
(1) a majority of our directors and (2) the director designated by Freeman
Spogli:
. the acquisition of any business or assets for a purchase price in excess
of $75.0 million, except for (1) the acquisition of any business or asset
by an investment fund that is controlled by us or any of our subsidiaries
in connection with the ordinary course conduct of our investment advisory
and management business or that of any of our subsidiaries or (2)
acquisitions in connection with the origination of mortgages by us or any
of our subsidiaries;
. the sale or other disposition of assets of our subsidiaries for aggregate
consideration having a fair market value in excess of $75.0 million,
other than (1) the sale of other disposition of any business or asset by
an investment fund that is controlled by us or any of our subsidiaries in
connection with the ordinary course conduct of our investment advisory
and management business of us or any of our subsidiaries or (2) sales or
dispositions in connection with the origination of mortgages by us or any
of our subsidiaries;
. incur indebtedness, unless the indebtedness would (1) be permitted
pursuant to the terms of the documents governing the indebtedness entered
into by us in connection with the closing of the merger as in effect on
the closing date of the merger, including any refinancing or replacement
of this indebtedness in an equal or lesser aggregate principal amount or
(2) immediately following the incurrence, the ratio of (A) the
consolidated indebtedness of us and our subsidiaries determined in
accordance with United States generally accepted accounting principles
applied in a manner consistent with our consolidated financial statements
to (B) the twelve-month normalized EBITDA, does not exceed 4.5:1; or
. issue our capital stock, or options, warrants or other securities to
acquire capital stock of us, to our employees, directors or independent
contractors or any of our subsidiaries if the issuances, in the
aggregate, exceed 5% of the total amount of our outstanding capital stock
immediately after the closing of the merger agreement on a fully diluted
basis, other than (1) issuances to our employees, directors or
independent contractors and those of our subsidiaries of up to 25% of our
capital stock on a
81
fully-diluted basis within six months of the closing of the merger and (2)
issuances in amounts equal to our capital stock repurchased by us from, or
the options, warrants or other securities to acquire capital stock
cancelled by us or our subsidiaries or terminated or expired without prior
exercise with respect to, persons who, at the time of the repurchase,
cancellation, termination or expiration, were current or former employees,
directors or independent contractors of us or our subsidiaries.
Other Provisions
Information and Inspection. Pursuant to the securityholders' agreement, we
will provide specified types of annual, quarterly and monthly financial
statements to the BLUM Funds, Freeman Spogli, DLJ Investment Funding, Inc. and
the other purchasers of our senior notes and the related Class A common stock
so long as they own 1% of our outstanding common stock in the aggregate,
Frederic Malek, The Koll Holding Company and any other securityholder who is a
party to the securityholders' agreement and owns greater than 10% of our total
outstanding common stock. In addition, we will grant to these same
securityholders the right to inspect our books and records. These information
and inspection rights will be subject to a confidentiality provision contained
in the securityholders' agreement.
Other Indemnification. We will indemnify and hold harmless (a) each of the
securityholder parties to the securityholders' agreement and each of their
respective affiliates and any person who controls them, (b) each of
the directors, officers, employees and agents of the persons indicated in
clause (a) and (c) each of the heirs, executors, successors and assigns of the
persons indicated in clause (a) from all damages, claims, losses, expenses,
costs, obligations and liabilities, including reasonable attorneys' fees and
expenses but excluding any special or consequential damages against the
indemnified party, suffered or incurred by the indemnified persons listed above
to the extent arising from (1) the business, operations, liabilities or
obligations of us or our subsidiaries or (2) the indemnified person's ownership
of our common stock.
Additional Securities Subject to the Agreement. Except for securities
acquired by Raymond Wirta or Brett White in connection with the anticipated
securities offerings being made by this prospectus, each securityholder has
agreed that any other of our equity securities which he or it later acquire by
means of a stock split, stock dividend, distribution, exercise or conversion of
securities or otherwise will be subject to the provisions of the
securityholders' agreement to the same extent as if held on the closing date of
the merger.
Termination
The securityholders' agreement will terminate with respect to the provisions
referred to below as follows:
. with respect to each of the provisions summarized in the sections titled
"Governance" and "Other Provisions--Information and Inspection" above
other than the fourth and fifth paragraphs in the section titled
"Governance--Composition of Board of Directors and Committees," upon
completion of an underwritten initial public offering in which shares
become listed on a national securities exchange or the Nasdaq National
Market;
. with respect to the provisions summarized in the section titled
"Limitations on Transfer" above, upon the expiration of the restricted
period;
. with respect to the provisions summarized in the section titled
"Registration Rights" above other than the section titled "Registration
Rights--Indemnification" in the manner set forth in the section titled
"Registration Rights--Expiration;"
. with respect to the provisions summarized in the sections titled
"Registration Rights--Indemnification" and "Other Provisions--Other
Indemnification" upon the expiration of the applicable statutes of
limitations; and
. with respect to all provisions contained within the securityholders'
agreement other than those described in the immediately preceding bullet
point, upon (1) the sale of all or substantially all of the equity
82
interests in us to a third party whether by merger, consolidation or
securities or otherwise or (2) the approval in writing by the BLUM Funds,
Freeman Spogli and a majority of the shares of our common stock owned by
the other securityholder parties to the agreement.
Contribution and Voting Agreement
Contributions. Pursuant to the contribution and voting agreement,
immediately prior to the merger, each of the members of the buying group will
contribute all of his or its shares of CB Richard Ellis Services' common stock
to us. Each of these shares contributed to us will be cancelled as a result of
the merger, and we will not receive any consideration for these shares of CB
Richard Ellis Services common stock. We will issue one share of our Class B
common stock in exchange for each share of CB Richard Ellis Services common
stock contributed to us. This will result in the issuance to the buying group
of an aggregate of 8,052,087 shares of our Class B common stock in exchange for
these contributions.
Also pursuant to the contribution and voting agreement, the BLUM Funds have
agreed to purchase for cash immediately prior to the merger a minimum of
2,553,879 shares of common stock at $16.00 per share. In addition the BLUM
Funds have agreed to purchase for cash an additional number of shares of our
Class B common stock for $16.00 per share equal to (1) 3,236,639 shares minus
(2) the number of shares of our Class A common stock and stock fund units
subscribed for in the offerings made by this prospectus plus (3) the aggregate
amount of full-recourse notes delivered by designated managers in the offerings
divided by $16.00 per share. The number of shares purchased by the BLUM Funds
will be reduced by 241,885 shares, which is the sum of the 10 shares of CBRE
Holding Class B common stock initially owned by RCBA Strategic and the 241,875
shares of CBRE Holding Class B common stock purchased by RCBA Strategic for
$16.00 per share in connection with the closing of the sale of 11 1/4% senior
subordinated notes by BLUM CB Corp. After the offerings are completed,
depending on the amount to which the offerings are subscribed, the shares of
our and Class B common stock owned by the buying group will be equal to between
approximately 80% and 96% of our outstanding Class A and Class B common stock,
taken together. Only members of the buying group will have an opportunity to
acquire shares of our Class B common stock.
The shares of Class B common stock to be purchased for cash by the BLUM
Funds under the contribution and voting agreement will be allocated between the
two BLUM Funds in the following manner:
. the first 1,422,014 shares will be purchased by RCBA Strategic;
. the next 2,500,000 shares will be purchased by Blum Strategic Partners
II; and
. any additional shares to be purchased will be allocated equally between
RCBA Strategic and Blum Strategic Partners II, subject to Blum Strategic
Partners II not purchasing more than 3,125,00 shares in the aggregate.
Warrants. The contribution and voting agreement also provides that upon
consummation of the merger, the warrants to acquire 364,884 shares of CB
Richard Ellis Services common stock owned by Freeman Spogli will be cancelled
and we will issue new warrants to them to purchase up to an aggregate number of
shares of our Class B common stock equal to the number that represents the same
percentage of the total outstanding shares of our common stock immediately
after consummation of the merger as the warrants to acquire 364,884 shares of
CB Richard Ellis Services common stock entitled Freeman Spogli to acquire
immediately prior to the consummation of the merger. The new warrants to
acquire our Class B common stock will expire on August 27, 2007. The terms of
these new warrants are set forth in a form of warrant agreement that is filed
as an exhibit to the registration statement of which this prospectus forms a
part.
The contribution and voting agreement further provides that, upon the
closing of the merger, the warrants to acquire 84,988 shares of CB Richard
Ellis Services common stock beneficially owned by Ray Wirta and/or Donald Koll
will be converted into the right to receive $1.00 per share underlying these
warrants and will no longer represent the right to receive any securities of,
or other consideration from, CB Richard Ellis Services or us.
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USE OF PROCEEDS
We estimate that our net cash proceeds from the offerings will be
approximately $33.7 million based on the offering price of $16.00 per share and
after deducting estimated offering expenses.
The proceeds of the offering of shares for direct ownership, the issuance of
senior notes and related Class A common stock by CBRE Holding, and the cash
contribution from the BLUM Funds, together with the initial borrowings under
the new senior secured credit facilities of CB Richard Ellis Services and the
proceeds from the 11 1/4% senior subordinated notes of BLUM CB Corp., will be
used primarily to pay CB Richard Ellis Services' stockholders, other than the
members of the buying group, $16.00 per share in the merger, repay
substantially all of CB Richard Ellis Services' existing indebtedness and pay
fees and expenses associated with the merger transactions.
We have summarized below the estimated sources and uses of funds and
contributions for the merger transactions and the offerings. Except as noted,
the estimated sources and uses below assume consummation of the merger
transactions and the offerings as of March 31, 2001.
Amount
(in millions)
-------------
Sources of Funds and Contributions:
Cash on hand before the merger transactions and the offerings... $ 20.3
11 1/4% senior subordinated notes due 2011 (/1/)................ 225.6
Revolving credit facility (/2/)................................. 35.0
Term loan A facility (/3/)...................................... 50.0
Term loan B facility (/3/)...................................... 175.0
16% senior notes due 2011 and related Class A common stock...... 65.0
Equity contribution (/4/)(/5/).................................. 228.7
------
Total sources................................................. $799.6
======
Amount
(in millions)
-------------
Uses of Funds and Contributions:
Payment of cash merger consideration and rollover of equity
(/5/)(/6/)..................................................... $342.4
Repay existing revolving credit facility and other short-term
borrowings (/7/)............................................... 226.4
Repurchase outstanding 8 7/8% senior subordinated notes due 2006
(/3/).......................................................... 175.0
Transaction costs (/8/)......................................... 51.6
Stock loans (/9/)............................................... 2.7
Cash on hand after closing ..................................... 1.5
------
Total uses.................................................... $799.6
======
- --------
(1) $229 million in aggregate principal amount of 11 1/4% senior subordinated
notes due 2011 were issued and sold by BLUM CB Corp. on June 7, 2001 for
$225.6 million in the aggregate. The proceeds from the offering were
deposited in an escrow account and will be released to CB Richard Ellis
Services in connection with the completion of the merger. CB Richard Ellis
Services will assume the 11 1/4% senior subordinated notes if the merger is
completed.
(2) The revolving credit facility has a total capacity of $100.0 million.
(3) To the extent all of CB Richard Ellis Services' existing 8 7/8% senior
subordinated notes are not tendered, the amount it must pay to repurchase
those notes will be reduced and the gross proceeds from the term loan
facilities will be reduced by a corresponding amount.
(4) Includes the following: (a) $35.8 million in proceeds (including the
irrevocable assignment of the right to receive cash proceeds) from the
issuance of our Class A common stock and $29.5 million in stock fund
84
units in the CB Richard Ellis Services' deferred compensation plan
contributed to us by employees; (b) $40.9 million in proceeds from the
issuance of our Class B common stock to the BLUM Funds; and (c) $122.5
million of CB Richard Ellis Services equity contributed by the buying group
to us. To the extent that the offerings of equity to CB Richard Ellis
Services employees are not fully subscribed or such shares are purchased
with full-recourse notes, the BLUM Funds will purchase an equal number of
additional shares of our Class B common stock.
(5) Includes 2,345,900 shares of CB Richard Ellis Services common stock that
are being contributed to us by RCBA Strategic that have been valued at
RCBA Strategic's historical equity basis of $12.87 per share rather than
at the merger transaction value of $16.00 per share.
(6) Includes the following: (a) $190.4 million in cash merger consideration
payable to CB Richard Ellis Services' stockholders other than the buying
group; (b) $29.5 million of stock fund units in the CB Richard Ellis
Services' deferred compensation plan that will either be switched into
other investment alternatives under the deferred compensation plan or
rolled-over into our stock fund units in conjunction with the merger; and
(c) $122.5 million of CB Richard Ellis Services common stock and warrants
to be contributed by the buying group to us.
(7) The amount of loans outstanding under CB Richard Ellis Services' existing
revolving credit facility was approximately $218 million as of March 31,
2001 and $225 million as of July 3, 2001.
(8) Includes fees and expenses in connection with the merger and related
transactions, including these offerings.
(9) Consists of an aggregate of $2.7 million of loans to be made to Ray Wirta
and Donald Koll to replace their existing margin loans.
DIVIDEND POLICY
Neither CB Richard Ellis Services nor we have declared or paid dividends on
its or our common stock. We presently anticipate that we will retain all of our
future earnings to finance the development and expansion of our business and
provide working capital. Therefore, we do not anticipate paying any cash
dividends on our Class A common stock or Class B common stock. The terms of our
senior notes, CB Richard Ellis Services' new credit agreement and the 11 1/4%
senior subordinated notes of BLUM CB Corp. which will be assumed by CB Richard
Ellis Services and guaranteed by us will restrict our ability to pay dividends.
See "Description of Indebtedness--16% Senior Notes Due 2011," "--CB Richard
Ellis Services Senior Secured Credit Facilities" and "--BLUM CB Corp.'s 11 1/4%
Senior Subordinated Notes Due 2011."
85
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2001:
. on an actual basis for CB Richard Ellis Services;
. on a pro forma basis for CBRE Holding to reflect the completion of the
merger transactions and the purchase by the BLUM Funds of a number of
shares of Class B common stock equal to the number of shares of Class A
common stock being offered by this prospectus; and
. on a pro forma as adjusted basis to give effect to the offerings being
made by this prospectus and the application of the estimated net proceeds
from the offerings.
As of March 31, 2001
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
Cash and cash equivalents...................... $ 20,339 $ 1,485 $ 1,485
======== ======== ========
Current maturities of long-term debt........... 9,579 45,411 45,411
Long-term debt, excluding current portion...... 409,653 516,289 516,289
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; 8,000,000
shares authorized, no shares issued or
outstanding, actual, no shares authorized,
issued or outstanding, pro forma and pro
forma as adjusted........................... -- -- --
Common stock of CB Richard Ellis Services,
$0.01 par value; 100,000,000 shares
authorized, 20,636,051 shares issued and
outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as
adjusted.................................... 217 -- --
Class A common stock of CBRE Holding, $0.01
par value; shares authorized; no shares
issued and outstanding, actual;
521,847 shares issued and outstanding, pro
forma; 2,599,648 shares issued and
outstanding, pro forma as adjusted.......... -- 5 27
Class B common stock of CBRE Holding, $0.01
par value; shares authorized; no shares
issued and outstanding, actual, 13,842,605
shares issued and outstanding, pro forma;
10,605,966 shares issued and outstanding,
pro forma as adjusted....................... -- 138 107
Additional paid-in capital................... 365,420 236,880 236,889
Notes receivable from sale of stock.......... (11,661) -- --
Accumulated deficit.......................... (91,943) -- --
Accumulated other comprehensive loss......... (21,897) -- --
Treasury stock, at cost...................... (15,844) -- --
-------- -------- --------
Total stockholders' equity ................ 224,292 237,023 237,023
-------- -------- --------
Total capitalization....................... $643,524 $798,723 $798,723
======== ======== ========
The "actual" column in the table above excludes the following shares:
. 2,730,639 shares of CB Richard Ellis Services common stock issuable upon
the exercise of option granted under various stock option plans of CB
Richard Ellis Services and its subsidiaries;
. 51,427 shares of CB Richard Ellis Services common stock reserved for
future issuance upon the exercise of options available for future grant
under various stock option plans of CB Richard Ellis Services and its
subsidiaries;
. 1,806,326 shares of CB Richard Ellis Services common stock committed for
future issuance under the CB Richard Ellis Services deferred compensation
plan; and
86
. 598,147 shares of CB Richard Ellis Services common stock issuable upon
the exercise of outstanding warrants to acquire CB Richard Ellis Services
common stock at an exercise price of $30.00 per share.
The "pro forma" column in the table above excludes the following shares:
. 910,199 shares of CBRE Holding Class A common stock issuable upon the
exercise of options to be allocated to employees by our board of
directors after the merger at an exercise price of $50.00 per share;
. 182,040 shares of CBRE Holding Class A common stock reserved for future
issuance upon the exercise of options available for future grant under
CBRE Holding's 2001 Stock Incentive Plan; and
. 264,027 shares of CBRE Holding Class B common stock issuable upon the
exercise of warrants to acquire CBRE Holding Class B common stock at an
exercise price of $30.00 per share.
The "pro forma as adjusted" column in the table above assumes full
subscription to the offerings and excludes the following shares:
. 1,820,397 shares of CBRE Holding Class A common stock issuable upon the
exercise of options to be granted in this offering at an exercise price
of $16.00 per share;
. 910,199 shares of CBRE Holding Class A common stock issuable upon the
exercise of options to be allocated to employees by our board of
directors after the merger at an exercise price of $50.00 per share;
. 182,040 shares of CBRE Holding Class A common stock reserved for future
issuance upon the exercise of options available for future grant under
CBRE Holding's 2001 Stock Incentive Plan;
. 2,003,733 shares of CBRE Holding Class A common stock underlying stock
fund units in the CB Richard Ellis Services' deferred compensation plan;
and
. 264,027 shares of CBRE Holding Class B common stock issuable upon the
exercise of warrants to acquire CBRE Holding Class B common stock at an
exercise price of $30.00 per share.
87
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined balance sheet and the unaudited
pro forma combined statements of operations are based on the historical
consolidated financial statements of us and CB Richard Ellis Services, included
elsewhere in this prospectus, as adjusted to give effect to the merger
transactions as if they had occurred as of March 31, 2001 in the unaudited pro
forma combined balance sheet and as of January 1, 2000 in the unaudited pro
forma combined statements of operations for the quarter ended March 31, 2001
and the year ended December 31, 2000.
The pro forma adjustments are based upon currently available information and
upon assumptions that our management believes are reasonable. Prior to the
merger transactions, RCBA Strategic Partners, L.P. directly owned
2,345,900 shares of outstanding common stock of CB Richard Ellis Services,
which represented approximately 11% of the outstanding common stock prior to
the merger. A series of investment partnerships (the Investment Funds), which
are related to the general partner of RCBA Strategic, owned 1,077,986 shares of
outstanding common stock of CB Richard Ellis Services, which represented
approximately 5% of the outstanding common stock prior to the merger. Neither
RCBA Strategic nor its general partner controls the Investment Funds.
Additionally, other members of the "buying group" owned 4,628,201 shares of
outstanding common stock of CB Richard Ellis Services, which represented
approximately 23% of the outstanding common stock prior to the merger.
Therefore the total combined ownership of the other members of the buying
group, including the Investment Funds whose shares will be acquired by CBRE
Holding and RCBA was 8,052,087 shares of outstanding common stock of CB Richard
Ellis Services, or approximately 39% of the outstanding common stock prior to
the merger. Therefore, neither RCBA Strategic, the Investment Funds nor any
member of the buying group or any combination thereof controlled CB Richard
Ellis Services prior to the merger.
Prior to the merger, RCBA Strategic controlled CBRE Holding through its
ownership of 100% of all issued and outstanding common stock of CBRE Holding.
In conjunction with the merger, Blum Strategic Partners II, L.P. will acquire a
portion of the outstanding common stock of CBRE Holding. Blum Strategic
Partners II is related to RCBA Strategic's general partner. Neither RCBA
Strategic nor its general partner will control Blum Strategic Partners II. RCBA
Strategic will control CBRE Holding upon completion of the merger. Subsequent
to the merger, RCBA Strategic will have the right to:
. Appoint a majority of the board of directors of CBRE Holding.
. Control approximately 87% of the voting power of CBRE Holding indirectly
through the security holders agreement to be entered into with the other
members of the buying group. The other members of the buying group other
than Blum Strategic Partners II must vote in a manner that is consistent
with how RCBA Strategic will vote on all matters that are subject to a
vote by the stockholders of CBRE Holding, subject to limited exceptions.
Other members of the buying group have certain rights defined in the
securityholders' agreement. Management believes that these rights are
consistent with the protective rights defined in EITF 96-16 and do not overcome
the presumption of RCBA Strategic's control over CBRE Holding.
After the merger, CB Richard Ellis Services will become a wholly owned
subsidiary of CBRE Holding. The 2,345,900 shares of outstanding common stock of
CB Richard Ellis Services owned by RCBA Strategic prior to the merger and
contributed to CBRE Holding have been carried over at RCBA Strategic's book
value. The basis of accounting for the shares of CB Richard Ellis Services
common stock acquired by CBRE Holding that were not owned by RCBA Strategic
prior to the transactions have been accounted for as a purchase transaction by
CBRE Holding at fair value of $16.00 per share. As such, the transactions have
been accounted for as a step acquisition in accordance with Accounting
Principles Bulletin 16--"Accounting for Business Combinations." The acquisition
of unvested stock fund units in the CB Richard Ellis Services deferred
compensation plan have been accounted for in accordance with FASB
Interpretation Number 44 as discussed in note (m) to the accompanying unaudited
pro forma combined balance sheet. Management believes the fair
88
value of the acquired common stock and stock fund units is consistent with the
proposed merger consideration of $16.00 per share. The adjustments included in
the unaudited pro forma financial statements represent the effects of our
preliminary determination and allocation of the purchase price to the fair
value of the assets and liabilities acquired, based upon currently available
information. We cannot assure you that the actual effects will not differ
significantly from the pro forma adjustments reflected in these unaudited pro
forma financial statements.
The unaudited pro forma financial statements are not necessarily indicative
of either future results of operations or results that might have been achieved
if the transactions had been consummated as of the dates indicated. The
unaudited pro forma financial statements should be read in conjunction with the
historical consolidated financial statements and related notes of us and CB
Richard Ellis Services, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
89
CBRE Holding, Inc. and Subsidiaries
Unaudited Pro Forma Combined Balance Sheet
As of March 31, 2001
(in thousands, except share data)
As of March 31, 2001
-----------------------------------------------------------
CB Richard CBRE Pro Forma Pro Forma
Ellis Services Holding, Inc. (a) Adjustments Combined
-------------- ----------------- ----------- -----------
(Unaudited) (Unaudited)
ASSETS
------
Current assets:
Total cash and cash
equivalents.......... $ 20,339 $ -- $ 76,706 (b) $ 1,485
(2,700)(c)
(190,421)(d)
225,000 (e)
225,629 (f)
35,000 (g)
65,000 (h)
(17,150)(i)
(401,418)(j)
(14,000)(k)
Receivables, less (20,500)(l)
allowance for
doubtful accounts of
$11,959.............. 141,792 141,792
Prepaid expenses...... 9,819 9,819
Deferred taxes, net... 13,105 13,105
Other current assets.. 8,716 1,972 (m) 10,688
-------- ------ --------- ----------
Total current
assets............. 193,771 (16,882) 176,889
-------- ------ --------- ----------
Property and equipment,
net.................... 75,048 (4,473)(n) 70,575
Goodwill, net........... 415,299 122,507 (o)
21,571 (m)
195,050 (d)
1,604 (j)
14,000 (k)
20,500 (l)
26,460 (n)
(224,292)(p)
(18,342)(q) 574,357
Other intangible assets,
net.................... 44,169 17,150 (i)
(1,777)(n) 59,542
Cash surrender value of
insurance policies,
deferred compensation
plan................... 61,267 61,267 (r)(t/3/)
Investment in and
advances to
unconsolidated
subsidiaries........... 38,187 (1,005)(n) 37,182
Deferred taxes, net..... 35,316 10,097 (q) 45,413
Prepaid pension costs... 24,126 6,050 (n) 30,176
Other assets............ 44,113 2,700 (c)
(4,629)(d)
5,917 (m)
(17,955)(n) 30,146
-------- ------ --------- ----------
Total assets...... $931,296 $ -- $ 154,251 $1,085,547
======== ====== ========= ==========
90
CBRE Holding, Inc. and Subsidiaries
Unaudited Pro Forma Combined Balance Sheet
As of March 31, 2001
(in thousands, except share data)
As of March 31, 2001
----------------------------------------------------------
CB Richard CBRE Pro Forma Pro Forma
Ellis Services Holding, Inc.(a) Adjustments Combined
-------------- ---------------- ----------- -----------
(Unaudited) (Unaudited)
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Current liabilities:
Accounts payable and
accrued expenses...... $ 77,803 $ -- $ $ 77,803
Compensation and
employee benefits..... 63,790 63,790
Accrued bonus and
profit sharing........ 20,807 20,807
Income taxes payable... 14,696 (8,245)(q) 6,451
Short-term
borrowings............ 8,418 (8,418)(j) --
35,000 (g) 35,000
Current maturities of
long-term debt (u).... 1,161 9,250 (e) 10,411
-------- ------- --------- ----------
Total current
liabilities......... 186,675 27,587 214,262
Long-Term debt:
8 7/8% senior
subordinated notes,
net of unamortized
discount of $1,604 as
of March 31, 2001..... 173,396 (173,396)(j) --
Revolving credit
facility (r).......... 218,000 (218,000)(j) --
11 1/4% senior
subordinated notes,
net of a pro forma
unamortized discount
of $3,371 as of March
31, 2001.............. 225,629 (f) 225,629
Senior secured term
loans, net of a pro
forma unamortized
discount of $8,350 as
of March 31, 2001..... 215,750 (e) 215,750
16% senior notes, net
of a pro forma
unamortized discount
of $8,350 as of March
31, 2001.............. 65,000 (h)
(8,350)(s) 56,650
Other long-term debt... 18,257 18,257
-------- ------- --------- ----------
Total long-term debt
(u)................. 409,653 106,633 516,286
Deferred compensation
liability............. 79,980 79,980(t/3/)
Other liabilities...... 27,729 7,300 (n) 35,029
-------- ------- --------- ----------
Total liabilities.... 704,037 141,520 845,557
Minority interest...... 2,967 2,967
Stockholders' equity:
Preferred stock, $0.01
par value; 8,000,000
shares authorized; no
shares issued or
outstanding............ -- --
Common stock, $0.01
par value;
100,000,000 shares
authorized;
20,636,051 shares
issued and
outstanding at March
31, 2001.............. 217 (217)(p) --
Class A common stock;
$0.01 par value;
100,000,000 shares
authorized;
2,599,648 pro forma
shares issued and
outstanding at March
31, 2001.............. -- 22 (b)
5 (s) 27
Class B common stock;
$0.01 par value;
100,000,000 shares
authorized;
10,605,966 pro forma
shares issued and
outstanding at March
31, 2001.............. -- 26 (b)
81 (o) 107
Additional paid-in
capital............... 365,420 76,658 (b) --
122,426 (o)
29,460 (m)
(365,420)(p)
8,345 (s) 236,889
Notes receivable from
sale of stock......... (11,661) 11,661 (p) --
Accumulated deficit.... (91,943) 91,943 (p) --
Accumulated other
comprehensive loss.... (21,897) 21,897 (p) --
Treasury stock at
cost, 1,072,155
shares at March 31,
2001.................. (15,844) 15,844 (p) --
-------- ------- --------- ----------
Total stockholders'
equity.............. 224,292 12,731 237,023(t)
-------- ------- --------- ----------
Total liabilities and
stockholders'
equity.............. $931,296 $ -- $ 154,251 $1,085,547
======== ======= ========= ==========
91
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2001
(a) CBRE Holding has total cash and equity of $160.00 as of the pro forma
combined balance sheet date of March 31, 2001. Since the amounts in the pro
forma combined financial statements are presented in thousands, no amounts
have been shown for CBRE Holding.
(b) Consists of cash proceeds from the issuance of an aggregate 4,794,180
shares of CBRE Holding common stock and stock fund units to RCBA Strategic,
Blum Strategic Partners II, designated managers and non-management
employees at $16.00 per share. See note (t) for further detail.
(c) Represents the issuance of loans to Ray Wirta and Donald Koll in accordance
with the CBRE Holding voting and contribution agreement. These loans will
replace existing margin loans with a third party that are secured by
current shares of CB Richard Ellis Services common stock. The loans will be
full-recourse, accrue interest at a market rate, compounded annually and
payable quarterly, and have a stated maturity of five years. The loans will
be replaced by a margin loan with a third party when, if ever, CBRE Holding
common stock becomes freely tradable on a national securities exchange or
an over-the-counter market.
(d) Reflects the purchase of the outstanding common stock and options to
acquire common stock of CB Richard Ellis Services in conjunction with the
merger agreement, excluding the contribution of 8,052,087 shares in CB
Richard Ellis Services common stock owned by the buying group and
1,841,233 shares underlying stock fund units in the CB Richard Ellis
Services deferred compensation plan, which are assumed to be contributed to
CBRE Holding as non cash transactions reflected in Notes (n) and (o) below.
Total shares of CB Richard Ellis Services common stock currently
outstanding and shares underlying the stock fund units in the CB Richard
Ellis Services deferred compensation plan are 22,139,263 shares, including
the shares described in the previous sentence. The entries to record the
cash portion of the purchase of CB Richard Ellis Services is comprised of
the following:
Decrease Increase to Decrease in
to Cash Goodwill Other Assets
--------- -------------- ------------
(in thousands)
Purchase of 12,245,943 shares of
our common stock at $16.00 per
share............................. $(195,935) $195,935 $ --
Purchase of 2,837,969 options to
acquire our common stock.......... (5,074) 5,074 --
Repayment of loans secured by our
common stock included in other
assets (1)........................ 4,629 -- (4,629)
Repayment of loans secured by our
common stock included as a
reduction to our historical equity
(1)............................... 5,959 (5,959) --
--------- -------- -------
$(190,421) $195,050 $(4,629)
========= ======== =======
--------
(1) Members of management and highly compensated employees purchased shares
of common stock of CB Richard Ellis Services under various compensation
plans at fair market value on the date of grant. These purchases were
made under the terms of the 1996 Equity Incentive Plan, the 1999 Equity
Incentive Plan and certain purchases under the 1990 Stock Option Plan.
Payment for a portion of the purchase price of these shares was made by
the employee using either a non-recourse loan secured by the underlying
common stock issued or a recourse loan secured by the underlying common
stock issued and the personal assets of the participating employee. Non
recourse loans have been recorded as a reduction to equity, while
recourse loans are included other assets in the accompanying unaudited
pro forma combined balance sheet. In conjunction with the transactions,
employees owning stock through these plans with such secured loans will
receive $16.00 per share in merger consideration, less the per share
equivalent of any unpaid principal, plus accrued interest thereon,
unpaid under such loans as of the date of the merger.
(e) Represents the gross proceeds from our issuance of $225.0 million in senior
secured term loans. Current maturities of long-term debt includes $9.3
million in principal payments due on the senior secured term loans.
92
The $225 million in senior secured term loans will be comprised of two
separate facilities. The $50 million Tranche A facility is assumed for
purposes of this calculation to bear interest at the 3 Month LIBOR plus
3.25% (6.96% as of June 26, 2001). The $50 million Tranche A facility fully
amortized by maturity through quarterly principal payments over 6 years
(with an assumed maturity date in June 2007). $7.5 million in total annual
principal payments will be due quarterly during the first two years of the
loan, and $8.75 million in total annual principal payments will be due
quarterly during years 3 through 6 of the loan. The $175 million Tranche B
facility is assumed for purposes of this calculation to bear interest at 3
Month LIBOR plus 3.75% (7.46% as of June 26, 2001). The $175 million
Tranche B facility requires quarterly payments of principal of
approximately $437,500, with the remaining outstanding principal balance of
$163.2 million due upon maturity at the end of year 7 (with an assumed
maturity date in June 2008).
(f) Represents the proceeds from our issuance of $229.0 million in aggregate
principal amount of 11 1/4% senior subordinated notes. The $229 million in
aggregate principal amount of senior subordinated notes bear interest at a
fixed rate of 11 1/4% and will be due in June 2011. The senior
subordinated notes were issued at a $3.4 million discount, which is being
amortized over the life of the notes of 10 years to yield level
amortization.
(g) Represents the gross proceeds from the draw down on the new $100.0 million
revolving credit facility. The $100 million revolving credit facility is
assumed for purposes of this calculation to bear interest at 3 month LIBOR
plus 3.25% (6.96% as of June 26, 2001) and mature at the end of year 7.
Under the terms of the credit agreement, no amounts can be outstanding
under the revolving credit facility as of December 31 of each year. Any
outstanding principal will be due and payable in June 2008.
(h) Represents the gross proceeds from our issuance of $65.0 million in 16%
senior notes and related Class A common stock. The $65 million in senior
notes will be due in July 2011 and bear interest at a fixed rate of 16%.
(i) Represents the payment of $17.2 million in fees and commissions in
connection with the issuance of the $65.0 million in 16% senior notes by
CBRE Holding, the $225.0 million senior secured term loans by CB Richard
Ellis Services, the $229.0 million in aggregate principal amount of 11
1/4% senior subordinated notes issued by BLUM CB Corp. and the
$100.0 million revolving credit facility by CB Richard Ellis Services.
Annual aggregate maturity of total long term debt, excluding the revolving
credit facility, at March 31, 2001 on an unaudited pro forma basis is as
follows (assuming the merger transactions close in July 2001): 2001-$5.8
million; 2002-$11.8 million; 2003-$10.4 million; 2004-$10.6 million;
2005-$10.4 million; thereafter-$477.6 million.
(j) Represents the repayment of our historical debt outstanding as of March
31, 2001, comprised of $8.4 million in debt included in short-term
borrowings, $218.0 million outstanding under our existing revolving credit
facility, and $175.0 million outstanding in aggregate principal amount of
our existing 8 7/8% senior subordinated notes, net of unamortized debt
discount. The payment of the $1.6 million in unamortized debt discount was
recorded as an increase in goodwill. For the purposes of this pro forma
adjustment, we have assumed that all of our existing 8 7/8% senior
subordinated notes will be tendered in connection with the merger and the
related transactions.
(k) Represents the payment of $14.0 million of repayment premiums on our
existing $175.0 million 8 7/8% senior subordinated notes, which was
recorded as an increase in goodwill. For the purposes of this pro forma
adjustment, we have assumed that all of our existing 8 7/8% senior
subordinated notes will be tendered in connection with the merger and the
related transactions. As of June 8, 2001, a majority of the holders of CB
Richard Ellis Services' 8 7/8% senior subordinated notes had tendered
their notes.
(l) Represents estimated transaction fees and related costs to be incurred in
connection with the acquisition of CB Richard Ellis Services by CBRE
Holding, excluding $31.2 million in financing costs included in Notes (i)
and (k) above.
(m) Consists of the issuance of 1,841,233 shares underlying CBRE Holding Class
A stock fund units in the CB Richard Ellis Services deferred compensation
plan in conjunction with the offerings. The shares of CB Richard Ellis
Services common stock underlying stock fund units in the deferred
compensation
93
plan include approximately 996,339 stock fund units that are fully vested
prior to the merger and 844,895 stock fund units that are unvested prior to
the merger. In conjunction with the merger transactions, a change in
control will occur in accordance with the terms of the deferred
compensation plan for approximately 351,795 unvested stock fund units
associated with the 1999 company matching contribution, and these units
will become fully vested when the merger is completed. Upon acceleration of
vesting resulting from the change in control, CB Richard Ellis Services
will take a charge against income immediately prior to the consummation of
the transaction related to these 351,795 stock fund units. After the
merger, there will remain approximately 493,100 unvested stock fund units
in the CB Richard Ellis deferred compensation plan. The unvested stock fund
units issued by CBRE Holding in exchange for these remaining unvested stock
fund units of CB Richard Ellis Services have been accounted for as a
deferred compensation asset included in other current assets and other
assets in the accompanying unaudited pro forma combined balance sheet. The
deferred compensation asset will be amortized as compensation expense over
their remaining vesting period for such stock fund units. Vested stock fund
units, including those that vest due to the change in control, have been
included in goodwill in the accompanying unaudited pro forma combined
balance sheet. The above accounting treatment is in accordance with
Financial Interpretation Number 44 "Accounting for Certain Transactions
Involving Stock Compensation." CBRE Holding will value all stock fund units
at $16.00 per share. See Note (t) for further details.
(n) Represents adjustments to reflect the identifiable assets and liabilities
of CB Richard Ellis Services acquired at their estimated current fair
value, which resulted in the following adjustments:
Amount
(in thousands)
--------------
Property and equipment, net................................ $ (4,473)
Goodwill, net.............................................. 26,460
Other intangible assets, net............................... (1,777)
Investment in and advances to unconsolidated subsidiaries.. (1,005)
Prepaid pension costs...................................... 6,050
Other assets............................................... (17,955)
Other liabilities.......................................... (7,300)
--------
$ --
========
The amount of interest carried over for RCBA Strategic was calculated as
the original cost basis of 2,345,900 shares of CB Richard Ellis Services
owned by RCBA Strategic prior to the merger or approximately $11.54 per
share, adjusted for its share of diluted earnings per share of
approximately $1.33, from the date RCBA Strategic acquired such shares
through March 31, 2001.
Following are the calculations of (1) the purchase price of the acquisition of
CB Richard Ellis Services, (2) the allocation of that purchase price to the
assets and liabilities of CB Richard Ellis Services, and (3) the calculation
of goodwill of CBRE Holding after consummation of the merger.
Calculation of the Purchase Price of CB Richard Ellis Services:
Shares of CB Richard Ellis Services
-------------------------------------
RCBA
Stockholder: Strategic Other Total
- ------------ ----------- ------------ ------------
Total Shares and Stock Fund Units....... 2,345,900 19,793,363 22,139,263
Value Per Share......................... $ 12.87 $ 16.00 NA
----------- ------------ ------------
Fair Value.............................. $30,191,733 $316,693,808 $346,885,541
Fair Value of 264,027 $30 warrants to
acquire common stock of CB Richard
Ellis Services at $30 per share valued
at $3.85 per warrant at $3.85.......... NA $ 1,016,504 $ 1,016,504
Purchase of 2,837,969 Options to acquire
common stock of CB Richard Ellis
Services............................... NA 5,074,000 5,074,000
----------- ------------ ------------
Total Purchase Price.................. $30,191,733 $322,784,312 $352,976,045
=========== ============ ============
94
Allocation of the Purchase Price to the Assets and Liabilities of CB Richard
Ellis Services:
Fair Value
--------------
(in thousands)
Assets:
Property and Equipment........................................ $ 70,575
Other Intangible Assets....................................... 42,392
Other Assets.................................................. 26,158
Investments In and Advances to Unconsolidated Subsidiaries.... 37,182
Non Current Deferred Taxes, net............................... 45,413
Prepaid Pension Costs......................................... 30,176
All Other Assets.............................................. 255,038
---------
Total Assets.................................................. 506,934
Liabilities:
Income Taxes Payable.......................................... 6,451
Other Long Term Liabilities................................... 35,029
All Other Liabilities......................................... 661,612
---------
Total Liabilities............................................. 703,092
Minority Interest............................................... 2,967
---------
Net Liabilities in Excess of Identifiable Assets.............. $(199,125)
=========
Calculation of CBRE Holding Goodwill:
Total Purchase Price.......................................... $ 352,976
Plus:
Fair Value of Liabilities in Excess of Assets............... 199,125
Repayment of Loans Included as a Reduction to CB Richard
Ellis Services Equity...................................... (5,959)
Extinguishment Costs related to CB Richard Ellis Services
Existing Debt.............................................. 15,604
Deal Costs.................................................. 20,500
Less: Fair Value of Unvested Stock Fund Units Recorded as
Deferred Compensation Asset.................................. (7,889)
---------
Total Goodwill.............................................. $ 574,357
=========
(o) Consists of the issuance of 3,423,886 shares and 4,628,201 shares of CBRE
Holding Class B common stock to RCBA Strategic and the other members of the
buying group, respectively, in exchange for the contribution of shares they
currently own in CB Richard Ellis Services prior to the merger. See Note
(t) for further detail.
(p) Represents the elimination of the historical equity of CB Richard Ellis
Services which resulted in the following adjustments:
Amount
(in thousands)
--------------
Goodwill, net............................................... $(224,292)
Common stock................................................ 217
Additional paid-in capital.................................. 365,420
Notes receivable from sale of stock......................... (11,661)
Accumulated deficit......................................... (91,943)
Accumulated other comprehensive loss........................ (21,897)
Treasury stock at cost...................................... (15,844)
---------
$ --
=========
95
(q) Represents adjustments to reflect the tax effect of the pro forma
adjustments included in Notes (j), (k), (l) and (n), which resulted in the
following adjustments:
Amount
(in thousands)
--------------
Goodwill, net............................................... $(18,342)
Deferred taxes, net......................................... 10,097
Income taxes payable........................................ 8,245
--------
$ --
========
(r) Effective June 1, 2001, a new interest index fund investment option will be
established in our deferred compensation plan, which will be an unfunded
long term obligation of our company. Participants will have the option to
transfer funds invested on their behalf from the insurance index fund,
which is included in the $61.3 million cash surrender value of insurance
proceeds, deferred compensation plan, in the accompanying pro forma
combined balance sheet, to this new interest index fund option. We will
utilize any cash received from participants to pay down any outstanding
balance on our revolving credit facility. To the extent employees select
this new investment option, there will be a decrease in cash surrender
value of insurance proceeds, deferred compensation plan, with a
corresponding decrease to any outstanding borrowings under our revolving
credit facility. No amounts have been reflected in the unaudited pro forma
combined balance sheet. In addition, designated managers may transfer into
stock fund units up to an aggregate of $2.6 million of deferred
compensation plan account balances included in cash surrender value of
insurance policies, deferred compensation plan. For each $1.00 of account
balances transferred to stock fund units in this manner, the pro forma
deferred compensation plan liability of $80.0 million as of March 31, 2001
and the cash surrender value of insurance policies, deferred compensation
plan $61.3 million as of March 31, 2001 will decrease by $1.00.
(s) Represents the issuance of 521,847 shares of CBRE Holding Class A common
stock at $0.01 per share, with a fair value of $16.00 per share, in
conjunction with the issuance of the $65.0 million in aggregate principal
amount of our 16% senior notes. The issuance of this stock, valued at $8.4
million, is recorded as a non-cash discount to the senior notes which will
be amortized as interest expense over the term of the notes of 10 years to
yield level amortization.
96
(t) The following table assumes the offerings will be fully subscribed by
designated managers and non-management employees. Actual subscriptions to
the offerings may be materially different than our assumptions incorporated
below. The pro forma combined equity of CBRE Holding is calculated as
follows:
Class
of Basis Number of Pro Forma
Common Per Shares/ Combined
Description of Shareholder Stock Share Warrants Equity
-------------------------- ------ ------ ---------- ------------
Stock to be Issued in Conjunction with
the Voting and Contribution Agreement:
Rollover of stock in CB Richard Ellis
Services owned directly by RCBA
Strategic (1)......................... B $12.87 2,345,900 $ 30,191,733
Purchase and contribution to CBRE
Holding of stock in CB Richard Ellis
Services currently owned by entities
related to the general partner of RCBA
Strategic............................. B 16.00 1,077,986 17,247,776
Rollover of stock in CB Richard Ellis
Services owned by other members of the
buying group.......................... B 16.00 4,628,201 74,051,216
---------- ------------
Subtotal............................. 8,052,087 121,490,725
Issuance of 264,027 warrants to Freeman
Spogli in exchange for current
warrants to acquire common stock of
CB Richard Ellis Services............. B 3.85 NA 1,016,504
---------- ------------
Subtotal--buying group............... 8,052,087 122,507,229
Stock to be Issued in Connection with
the Offerings:
Stock to be issued in conjunction with
the rollover of shares underlying the
stock fund units in the CB Richard
Ellis Services deferred compensation
plan (2).............................. A 16.00 1,841,233 29,459,728
---------- ------------
Subtotal--non-cash equity
contributions....................... 9,893,320 151,966,957
Stock to be issued to RCBA Strategic
and Blum Strategic Partners II in
exchange for cash (3)................. B 16.00 2,553,879 40,862,064
Stock to be issued to participants in
the CB Richard Ellis Services deferred
compensation plan in exchange for
amounts transferred from the insurance
index fund............................ A 16.00 162,500 2,600,000
Stock to be issued to designated
managers and non-management employees
for direct ownership in exchange for
cash, assignment of net merger
proceeds and recourse notes........... A 16.00 561,133 8,978,128
Stock to be issued for cash proceeds
from the merger and held in the CB
Richard Ellis 401(k) plan or for
direct ownership...................... A 16.00 1,516,668 24,266,688
---------- ------------
Subtotal--cash proceeds from the
offerings........................... 4,794,180 76,706,880
---------- ------------
Subtotal--equity transactions with
stockholders........................ 14,687,500 228,673,837
Stock to be issued to DLJ Investment
Funding, Inc. and the other purchasers
of our senior notes and the related
Class A common stock in connection
with the $65 million in aggregate
principal amount of 16% senior notes.. A 16.00 521,847 8,349,552
---------- ------------
Total stockholders equity............ 15,209,347 $237,023,389
========== ============
--------
(1) Basis per share for RCBA Strategic is comprised of its average per
share purchase price of CB Richard Ellis Services common stock of
$11.54, plus an average of $1.33 per share in earnings from the date
the shares were acquired through March 31, 2001.
(2) To the extent that there is a shortfall from the offerings of Class A
Common Stock of CBRE Holding to the designated managers and non-
management employees related to (1) shares underlying stock
97
fund units in the CB Richard Ellis Services deferred compensation plan,
(2) shares held in the CB Richard Ellis 401(k) plan, or (3) shares to be
issued to designated managers and employees for direct ownership in
exchange for cash, assignment of net merger proceeds and recourse notes,
RCBA Strategic and Blum Strategic Partners II are obligated to purchase
additional shares in CBRE Holding representing this shortfall. No
amounts have been reflected in the accompanying pro forma combined
balance sheet for recourse notes that may be issued to designated
managers in conjunction with the offerings.
(3) To the extent employees do not fully subscribe to the offering of the
996,338 currently vested shares of underlying stock fund units in the
CB Richard Ellis Services deferred compensation plan, the pro forma
deferred compensation plan liability of $80.5 million and the cash
surrender value of insurance policies, deferred compensation plan of
$61.3 million as of March 31, 2001 will increase by $16.00 per unit, up
to a maximum of $15.9 million, for each stock fund unit not converted
into the right to receive one share of CBRE Holding Class A common
stock. Any resulting shortfall will be funded by RCBA Strategic in
accordance with note (2) above. A portion of this commitment may be
satisfied by Blum Strategic Partners II.
(u) Net debt, defined as total debt outstanding less cash and cash equivalents,
will increase to $560.2 million in the pro forma combined balance sheet
from $398.9 million as actually reported by CB Richard Ellis Services as of
March 31, 2001, an increase of $161.3 million.
(v) The pro forma financial statements include anticipated cash proceeds from
the offerings, as well as non-cash equity contributions from members of the
buying group, as follows:
. $35.8 million in cash proceeds from the issuance of our Class A common
stock to employees.
. The contribution of $29.5 million in stock fund units held by employees
in the CB Richard Ellis Services deferred compensation plan contributed
to us in exchange for stock fund units underlying our Class A common
stock. Included in the $29.5 million figure is approximately $15.9
million in vested stock fund units for which employees have the right to
receive $16.00 per unit in cash in lieu of contributing such stock fund
units to us.
. $40.9 million in proceeds from the issuance of our Class B common stock
to the RCBA Strategic and Blum Strategic Partners II.
. The contribution of $122.5 million of equity in CB Richard Ellis
Services, owned by members of the buying group immediately prior to the
merger, to us in exchange for shares of our Class B common stock.
Included in the $122.5 million figure is approximately (a) $30.7 million
of equity of CB Richard Ellis Services currently owned directly by RCBA
Strategic entities related to the general partner of RCBA Strategic,
(b) $17.3 million of equity of CB Richard Ellis Services owned by and (c)
$75.1 million of equity of CB Richard Ellis Services owned by other
members of the buying group. RCBA Strategic has committed to purchase for
cash and contribute to us the $17.3 million in equity of CB Richard Ellis
Services owned by entities related to the general partner of RCBA
Strategic immediately prior to the transactions in accordance with the
voting and contribution agreement. These shares are not subject to the
offerings being registered in this document.
. In accordance with the amended and restated voting and contribution
agreement, RCBA Strategic has committed to contribute up to $110 million
in cash equity to us to fund any short fall resulting from a less than
full subscription to the offerings outlined above. This commitment
excludes the rollover contributions from the other members of the buying
group of $75.1 million and from RCBA Strategic of $30.7 million included
in the $122.5 million figure above, as stockholders are committed to
contribute such shares to us in accordance with the voting and
contribution agreement. A portion of this commitment may be satisfied by
Blum Strategic Partners II. We will issue additional shares of Class B
common stock to RCBA Strategic and Blum Strategic Partners II for any
additional cash contributed to us to make up for any shortfall from the
offerings.
98
In addition, CBRE Holding has firm commitments from the following lenders;
. $65 million in 16% senior notes from DLJ Investment Funding, Inc. and the
other purchasers of our senior notes;
. $229 million in 11.25% senior subordinated notes, issued and sold on June
7, 2001 for approximately $225.6 million;
. $225 million in a new senior secured credit facility with Credit Suisse
First Boston; and
. A $100 million revolving credit facility included in addition to the
senior secured credit facility with Credit Suisse First Boston.
As outlined above, we have firm commitments to receive up to $228.7 million
in equity from the members of the Buying Group, which has been reflected in
the accompanying unaudited pro forma combined balance sheet. As such, the
receipt of offering proceeds and the application of such proceeds have been
included in the unaudited pro forma financial statements.
99
CBRE Holding, Inc. and Subsidiaries
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2000
(in thousands)
Year Ended December 31, 2000
---------------------------------------------------
CB Richard
Ellis CBRE Holding, Pro Forma Pro Forma
Services Inc. Adjustments Combined
---------- ------------- ----------- -----------
(Unaudited) (Unaudited)
Revenue:
Leases................ $ 539,419 $ -- $ $ 539,419
Sales................. 389,745 389,745
Property and
facilities management
fees................. 110,654 110,654
Consulting and
referral fees........ 78,714 78,714
Appraisal fees........ 75,055 75,055
Loan origination and
servicing fees....... 58,190 58,190
Investment management
fees................. 42,475 42,475
Other................. 29,352 29,352
---------- ----- -------- ----------
Total revenue....... 1,323,604 1,323,604
Costs and Expenses:
Commissions, fees and
other incentives..... 634,639 634,639
Operating,
administrative, and
other................ 538,481 1,354 (a) 539,835
Depreciation and
amortization......... 43,199 (23,992)(b)
28,282 (a)
(162)(c) 47,327
---------- ----- -------- ----------
Operating income........ 107,285 (5,482) 101,803
Interest income......... 2,554 2,554
Interest expense........ 41,700 26,541 (d) 68,241
---------- ----- -------- ----------
Income before provision
for income tax......... 68,139 (32,023) 36,116
Provision for income
taxes.................. 34,751 (8,849)(e) 25,902
---------- ----- -------- ----------
Net income.............. $ 33,388 $ -- $(23,174) $ 10,214
========== ===== ======== ==========
Net income applicable to
common stockholders.... $ 33,388 $ 10,214
========== ==========
Basic earnings per
share.................. $ 1.60 $ 0.69
========== ==========
Weighted average shares
outstanding for basic
earnings per share..... 20,931,111 14,720,963 (f)
========== ==========
Diluted earnings per
share.................. $ 1.58 $ 0.69
========== ==========
Weighted average shares
outstanding for diluted
earnings per share..... 21,097,240 14,759,486 (f)
========== ==========
100
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(a) Reflects amortization of the estimated fair value of CB Richard Ellis
Services goodwill over 30 years and of identifiable intangible and other
assets over 3 to 10 years.
(b) Represents the reversal of CB Richard Ellis Services historical
amortization related to our goodwill and other intangible assets.
(c) Represents the net adjustment to CB Richard Ellis Services depreciation
expense resulting from fair value adjustments to property and equipment,
which are non-cash charges resulting from purchase accounting entries.
(d) The increase in pro forma interest expense as a result of the transactions
is summarized as follows:
Amount
(in thousands)
--------------
Interest on Tranche A senior secured term loan at 9.81%... $ 4,905
Interest on Tranche B senior secured term loan at 10.31%.. 18,043
Interest on 11 1/4% senior subordinated notes............. 25,763
Interest on the revolving credit facility at 9.81%........ 1,560
Interest on 16% senior notes.............................. 10,400
Interest on existing other borrowings (including capital
leases).................................................. 4,448
--------
Cash interest expense..................................... 65,119
Amortization of debt issuance costs:
($1.3 million over a 6 year amortization period).......... 208
($6.9 million over a 7 year amortization period).......... 982
($20.9 million over a 10 year amortization period)........ 1,932
--------
68,241
Less: historical cash interest expense.................... (39,404)
Less: historical amortization of debt issuance costs...... (2,296)
--------
Net increase.............................................. $ 26,541
========
For purposes of computing pro forma combined interest expense, the Tranche
A senior secured term loan is assumed to bear interest at an annual rate
of 3 month LIBOR plus margin of 3.25%, the Tranche B senior secured term
loan is assumed to bear interest at annual rate of 3 month LIBOR plus
margin of 3.75% and the revolving credit facility is assumed to bear
interest at an annual rate of 3 month LIBOR plus 3.25% on amounts
borrowed. LIBOR is based on our average 3 month LIBOR rate for fiscal year
2000 of 6.56% for purposes of computing pro forma combined interest
expense. As of June 26, 2001, the 3 month LIBOR was 3.71%. At a rate of
3.71%, the cash component of pro forma combined interest expense would
have been approximately $58.2 million for the year ended December 31,
2000, which would have represented a decrease of $6.9 million from pro
forma interest expense included in the accompanying unaudited pro forma
combined statement of operations. Each 1.0% change in the 3 month LIBOR
would have increased or decreased pro forma combined interest expense by
$2.4 million for the year ended December 31, 2000. Included in
amortization of debt issuance costs is the fair value of $8.4 million in
Class A common stock of CBRE Holding issued in accordance with the terms
of the 16% senior notes, which is being amortized over 10 years to yield
level amortization.
(e) Represents the tax effect of pro forma adjustments included in Notes (a)
through (d) above at a combined federal and state statutory tax rate of
38.5%, excluding certain items that are permanently non-deductible for tax
purposes.
(f) Reflects the pro forma number of weighted average shares giving effect to
the CBRE Holding common stock to be issued in connection with our purchase
of CB Richard Ellis Services and the offerings for purposes of computing
basic earnings per share, and the dilutive impact of the unvested stock
fund units
101
underlying the deferred compensation plan for purposes of computing diluted
earnings per share. The warrants to be issued to Freemen Spogli in
connection with the contribution and voting agreement and the options to be
issued to designated managers and non-management employees in connection
with the offerings are anti-dilutive and have been excluded from the
calculation of dilutive earnings per share. The weighted average number of
shares outstanding are calculated as follows:
Weighted average shares outstanding for basic earnings per
share:
Expected shares to be issued................................ 14,720,963
==========
Weighted average shares outstanding for dilutive earnings per
share:
Expected shares to be issued................................ 14,720,963
Dilutive effect of unvested shares underlying stock fund
units in the deferred compensation plan.................... 38,523
----------
Weighted average shares outstanding for diluted earnings per
share........................................................ 14,759,486
==========
102
CB Richard Ellis Services and Subsidiaries
Unaudited Pro Forma Combined Statement of Operations
For the Three Months Ended March 31, 2001
(in thousands)
Quarter Ended March 31, 2001
---------------------------------------------------
CB Richard
Ellis CBRE Holding, Pro Forma Pro Forma
Services Inc. Adjustments Combined
---------- ------------- ----------- -----------
(Unaudited) (Unaudited)
Revenue:
Leases.................. $ 103,166 $-- $ $ 103,166
Sales................... 73,843 73,843
Property and facilities
management fees........ 27,872 27,872
Consulting and referral
fees................... 16,367 16,367
Appraisal fees.......... 18,836 18,836
Loan origination and
servicing fees......... 14,812 14,812
Investment management
fees................... 8,549 8,549
Other................... 9,053 9,053
---------- --- ------- ----------
Total revenues........ 272,498 272,498
Costs and Expenses:
Commissions, fees and
other incentives....... 124,398 124,398
Operating,
administrative and
other.................. 134,079 374 (a) 134,453
Depreciation and
amortization........... 11,696 (5,929)(b)
7,078 (a)
(515)(c) 12,330
---------- --- ------- ----------
Operating income.......... 2,325 (1,008) 1,317
Interest income........... 800 800
Interest expense.......... 9,055 7,029 (d) 16,084
---------- --- ------- ----------
Loss before benefit for
income tax............... (5,930) (8,037) (13,967)
Benefit for income taxes.. (3,084) (2,224)(e) (5,308)
---------- --- ------- ----------
Net loss.................. $ (2,846) $-- $(5,813) $ (8,659)
========== === ======= ==========
Net loss applicable to
common stockholders...... $ (2,846) $ (8,659)
========== ==========
Basic loss per share...... $ (0.13) $ (0.59)
========== ==========
Weighted average shares
outstanding for basic
loss per share........... 21,309,550 14,720,963
========== ==========
Diluted loss per share.... $ (0.13) $ (0.59)
========== ==========
Weighted average shares
outstanding for diluted
loss per share........... 21,309,550 14,720,963
========== ==========
103
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(a) Reflects amortization of the estimated fair value of CB Richard Ellis
Services goodwill over 30 years and of identifiable intangible and other
assets over 3 to 10 years.
(b) Represents the reversal of CB Richard Ellis Services historical
amortization related to its goodwill and other intangible assets.
(c) Represents the net adjustment to CB Richard Ellis Services depreciation
expense resulting from fair value adjustments to property and equipment,
which are non-cash charges resulting from purchase accounting entries.
(d) The increase to pro forma interest expense as a result of the transactions
is summarized as follows:
Amount
(in thousands)
--------------
Interest on Tranche A senior secured term loan at 8.59%... $ 1,073
Interest on Tranche B senior secured term loan at 9.09%... 3,975
Interest on senior subordinated notes offered hereby...... 6,441
Interest on the revolving credit facility at 8.59%........ 200
Interest on 16% senior notes.............................. 2,600
Interest on other existing borrowings (including capital
leases).................................................. 1,013
-------
Cash interest expense..................................... 15,302
Amortization of debt issuance costs:
($1.3 million over a 6 year amortization period).......... 52
($6.9 million over a 7 year amortization period).......... 246
($20.9 million over a 10 year amortization period)........ 484
-------
16,084
Less: historical cash interest expense.................... (8,536)
Less: historical amortization of debt issuance costs...... (519)
-------
Net increase.............................................. $ 7,029
=======
For purposes of computing pro forma combined interest expense, the Tranche
A senior secured term loan is assumed to bear interest at an annual rate of
3 month LIBOR plus margin of 3.25%, the Tranche B senior secured term loan
is assumed to bear interest at an annual rate of 3 month LIBOR plus margin
of 3.75%, and the revolving credit facility is assumed to bear interest at
an annual rate of 3 month LIBOR plus 3.25% on amounts borrowed. LIBOR is
based on our average 3 month LIBOR rate for the three months ended March
31, 2001 of 5.34% for purposes of computing pro forma interest expense. As
of June 26, 2001, the 3 month LIBOR was 3.71%. At a rate of 3.71%, the cash
component of pro forma combined interest expense would have been
approximately $14.3 million for the three months ended March 31, 2001,
which would be a decrease of $1.0 million. Each 1.0% change in the 3 month
LIBOR would have had the impact of increasing or decreasing pro forma
combined interest expense by $0.6 million for the three months ended March
31, 2001. Included in amortization of debt insurance costs is the fair
value of $8.4 million in Class A common stock of CBRE Holding issued in
accordance with the terms of the 16% senior notes, which is being amortized
over 10 years to yield level amortization.
(e) Represents the tax effect of pro forma adjustments included in Notes (a)
through (d) above at a combined federal and state statutory tax rate of
38.5%, excluding certain items that are permanently non-deductible for tax
purposes.
104
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from CB Richard
Ellis Services' consolidated financial statements and should be read in
conjunction with CB Richard Ellis Services' financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. CB Richard Ellis
Services' historical results are not necessarily indicative of our future
results.
Quarter Ended
Year Ended December 31, March 31,
---------------------------------------------------------- ----------------------
1996 1997 1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share and per share data)
Statement of Operations
Data: (/1/)
Revenue................ $ 583,068 $ 730,224 $1,034,503 $1,213,039 $1,323,604 $ 260,919 $ 272,498
Operating income....... 48,429 59,088 78,476 76,899 107,285 9,239 2,325
Interest expense, net.. 22,620 13,182 27,993 37,438 39,146 9,196 8,255
Net income............. 70,549 24,397 24,557 23,282 33,388 20 (2,846)
Basic earnings (loss)
per share (/2/)(/4/).. 5.05 1.34 (0.38) 1.11 1.60 -- (0.13)
Weighted average shares
outstanding for basic
earnings per share.... 13,783,882 15,237,914 20,136,117 20,998,097 20,931,111 20,819,268 21,309,550
Diluted earnings (loss)
per share............. 4.99 1.28 (0.38) 1.10 1.58 -- (0.13)
Weighted average shares
outstanding for
diluted earnings per
share................. 14,126,636 15,996,929 20,136,117 21,072,436 21,097,240 20,851,184 21,309,550
Other Data:
EBITDA, excluding
merger-related and
other nonrecurring
charges (/3/)......... $ 62,003 $ 90,072 $ 127,246 $ 117,369 $ 150,484 $ 19,808 $ 14,021
Net cash provided by
operating activities.. 65,694 80,835 76,614 74,011 84,112 (67,522) (104,263)
Net cash used in
investing activities.. (10,906) (18,018) (223,520) (26,767) (35,722) 6,314 (536)
Net cash (used in)
provided by financing
activities............ (28,505) (64,964) 119,438 (37,721) (53,523) 58,794 104,940
December 31, March 31,
---------------------------------------------------------- ----------------------
1996 1997 1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Cash and cash
equivalents........... $ 49,328 $ 47,181 $ 19,551 $ 27,844 $ 20,854 $ 24,791 $ 20,339
Total assets........... 278,944 500,100 856,892 929,483 963,105 897,756 931,296
Total long-term debt... 148,529 146,273 373,691 357,872 303,571 416,531 409,653
Total liabilities...... 280,364 334,657 660,175 715,874 724,018 687,765 704,037
Total stockholders'
equity ............... (1,515) 157,771 190,842 209,737 235,339 206,711 224,292
Number of shares
outstanding........... 13,232,063 18,768,200 20,636,134 20,435,692 20,605,023 20,408,692 20,605,023
Book value per share... (0.18) 9.55 9.48 9.95 11.15 9.91 10.53
Ratios:
Earnings/fixed
charges (/5/)......... 1.75 2.33 2.17 1.79 2.15 0.97 0.63
Debt/equity............ (109.80) 0.97 2.04 1.74 1.33 2.04 1.87
Debt/EBITDA (/3/)...... 2.68 1.69 3.06 3.11 2.09 21.34 29.90
EBITDA/net interest
expense (/3/)......... 2.74 6.83 4.55 3.14 3.84 2.15 1.70
Operating expense as a
percentage of
revenue............... 39.2% 37.8% 43.4% 44.2% 40.7% 48.7% 49.2 %
EBITDA, excluding
merger-related and
other nonrecurring
charges as a
percentage of
revenue (/3/)......... 10.6% 12.3% 12.3% 9.7% 11.4% 7.6% 5.1 %
Net income as a
percentage of
revenue............... 12.1% 3.3% 2.4% 1.9% 2.5% -- % (1.0)%
International revenue
as a percentage of
consolidated revenue.. -- -- 14.5% 22.5% 22.4% 23.9% 22.6 %
- --------
(1) The results include the activities of Koll Real Estate Services from the
date of acquisition, August 28, 1997, REI Limited from the date of
acquisition, April 17, 1998, and CB Hillier Parker Limited from the date of
acquisition, July 7, 1998. For the year ended December 31, 1998, basic and
diluted loss per share include a deemed dividend of $32.3 million on the
repurchase of CB Richard Ellis Services' preferred
105
stock. From the year ended December 31, 1996 net income includes a tax
benefit of $55.9 million due to a reduction in CB Richard Ellis Services'
deferred tax asset valuation allowance. A portion of CB Richard Ellis
Services' net operating losses would be realizable due to its ability to
generate additional taxable income in the future.
(2) EPS represents earnings (loss) per share. See Per Share Information in
Note 9 of Notes to Consolidated Financial Statements.
(3) EBITDA, excluding merger-related and other nonrecurring charges represents
earnings before interest expense, income taxes, depreciation and
amortization of intangible assets and excludes merger-related and other
nonrecurring charges. CB Richard Ellis Services' management believes that
the presentation of EBITDA, excluding merger-related and other
nonrecurring charges will enhance a reader's understanding of our
operating performance and ability to service debt as it provides a measure
of cash generated, subject to the payment of interest and income taxes,
that can be used by CB Richard Ellis Services to service its debt and for
other required or discretionary purposes. Net cash that will be available
to us for discretionary purposes represents remaining cash, after debt
service and other cash requirements, such as capital expenditures, are
deducted from EBITDA, excluding merger-related and other nonrecurring
charges. EBITDA, excluding merger-related and other nonrecurring charges
should not be considered as an alternative to (a) operating income
determined in accordance with GAAP or (b) operating cash flow determined
in accordance with GAAP. This calculation of EBITDA may not be comparable
to similarly titled measures reported by other companies.
EBITDA, excluding merger related and other nonrecurring charges, is
calculated as follows:
Quarter Ended
Year Ended December 31, March 31,
------------------------------------------ ---------------
1996 1997 1998 1999 2000 2000 2001
------- ------- -------- -------- -------- ------- -------
(in thousands)
Operating Income........ $48,429 $59,088 $ 78,476 $ 76,899 $107,285 $ 9,239 $ 2,325
Add:
Depreciation and
amortization.......... 13,574 18,060 32,185 40,470 43,199 10,569 11,696
Merger-related and
other nonrecurring
charges............... -- 12,924 16,585 -- -- -- --
------- ------- -------- -------- -------- ------- -------
EBITDA, excluding
merger-related and
other nonrecurring
charges............... $62,003 $90,072 $127,246 $117,369 $150,484 $19,808 $14,021
======= ======= ======== ======== ======== ======= =======
(4) CB Richard Ellis Services has not declared any cash dividends on its
common stock for the periods shown.
(5) Includes a deficiency of $0.4 million for the quarter ended March 31, 2000
and a deficiency of $5.2 million for the quarter ended March 31, 2001.
106
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in forward-looking statements for many reasons, including the risks
described in "Risk Factors" and elsewhere in this prospectus. You should read
the following discussion with the sections of this prospectus titled "Unaudited
Pro Forma Combined Financial Data," "Selected Consolidated Financial Data" and
CB Richard Ellis Services' financial statements and related notes included
elsewhere in this prospectus.
Basis of Presentation
We currently do not conduct any business or have any operations and were
formed solely to serve as a holding company for CB Richard Ellis Services and
its subsidiaries. We will acquire CB Richard Ellis Services pursuant to an
amended and restated agreement and plan of merger, dated as of May 31, 2001,
pursuant to which our wholly-owned subsidiary, BLUM CB Corp. will merger into
CB Richard Ellis Services, which will survive the merger as our wholly-owned
subsidiary.
After the merger, our business and operations will be the same as that
conducted by CB Richard Ellis Services and its subsidiaries before the merger.
Accordingly, this section, Management's Discussion and Analysis of Financial
Condition and Results of Operations, includes a description of the historical
results of CB Richard Ellis Services, including discussions in the sections
entitled "Overview," "Recent Developments," "Results of Operations," "Segment
Operations," "Quarterly Financial Information," "Recent Acquisitions" and
"Recent Accounting Pronouncements." However, as a result of the merger and the
related financings, our liquidity and capital resources will change
significantly in specified areas from our consolidated financial position prior
to the merger. Accordingly, this Management's Discussion and Analysis of
Financial Condition and Results of Operations includes information regarding
our indebtedness after giving effect to the merger and the related financings
in the section titled "Quantitative and Qualitative Disclosures About Our
Market Risk." In addition, the section titled "Liquidity and Capital Resources"
discusses our liquidity and capital resources both historically and after
giving effect to the merger.
Overview
CB Richard Ellis Services is the largest global commercial real estate
services firm in magnitude of revenue, offering a full range of services to
commercial real estate occupiers, owners, lenders and investors. Through its
250 offices, it provides, under the CB Richard Ellis brand name and the CB
Hillier Parker brand name in the United Kingdom, services on a local, national
and international basis across approximately 100 markets in 44 countries.
During 2000, it advised on approximately 25,000 lease transactions involving
aggregate rents, under the terms of leases facilitated, of approximately $26.0
billion and approximately 7,500 sales transactions with transaction values
totaling approximately $26.0 billion. Also during 2000, CB Richard Ellis
Services managed approximately 516 million square feet of property, provided
investment management services for $10.0 billion of assets, originated nearly
$7.2 billion in loans, serviced $16.7 billion in loans engaged in over 31,000
valuation/appraisal and advisory assignments and serviced approximately
1,400 subscribers with proprietary research. In addition, at March 31, 2001, it
employed approximately 9,700 employees.
CB Richard Ellis Services reports its operations through three geographic
divisions and three operating segments:
. The Americas, which consists of the United States, Canada, Mexico and
operations located in Central and South America. Operations in Mexico,
Central and South America are referred to as the Latin America
operations.
. EMEA, which is an acronym for Europe, the Middle East and Africa. This
operating group became part of CB Richard Ellis Services through a series
of acquisitions, most significantly Hillier Parker and REI.
107
. Asia Pacific, which consists of operations in Asia, Australia and New
Zealand. These operations were acquired by CB Richard Ellis Services in
part through the REI acquisition and in total through a subsequent
acquisition.
Revenue from transaction management, which constitutes a substantial
majority of CB Richard Ellis Services' revenue, is subject to economic cycles.
However, CB Richard Ellis Services' significant size, geographic coverage,
number of transactions and large continuing client base tend to minimize the
impact of economic cycles on annual revenue and create what we believe is
equivalent to a recurring stream of revenue. CB Richard Ellis Services
estimates that approximately 57% of the costs and expenses associated with
transaction management are directly correlated to revenue while approximately
25% of the costs and expenses of management services and financial services are
directly correlated to revenue.
In addition, CB Richard Ellis Services' operations are directly affected by
actual and perceived trends in various national and economic conditions,
including interest rates, the availability of credit to finance commercial real
estate transactions and the impact of tax laws. CB Richard Ellis Services'
international operations are subject to political instability, currency
fluctuations and changing regulatory environments. To date, CB Richard Ellis
Services does not believe that general inflation has had a material impact upon
its operations. Revenues, commissions and other variable costs related to
revenues are primarily affected by real estate market supply and demand rather
than general inflation.
Recent Developments
In the latter part of the first quarter of 2001, CB Richard Ellis Services'
business was adversely affected by a slowdown in the U.S. economy in general
and certain local and regional U.S. economies in particular which have led to
deteriorating commercial real estate market conditions. While CB Richard Ellis
Services' revenue in the first quarter of 2001 increased approximately 4% as
compared to the first quarter of 2000, its revenues were below its expectations
and its costs and expenses, excluding depreciation and amortization, increased
by approximately 7.2% from the first quarter of 2000. Please refer to the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this prospectus for a detailed
discussion of CB Richard Ellis Services' first quarter performance.
CB Richard Ellis Services' first quarter results reflected a strong January
followed by a slowdown in its U.S. sales activities beginning in February and a
slowdown in U.S. lease activities beginning in March, as well as lower than
expected revenues in Europe and Asia Pacific. This weakness in sales and lease
activities has continued into the second quarter. Internal results indicate
that CB Richard Ellis Services' operating results for the second quarter ending
June 30, 2001 will be considerably below its operating results for the second
quarter ending June 30, 2000.
Following CB Richard Ellis Services' last major cost reduction program in
1999, it has continued to evaluate its operating expenses relative to its
performance. In response to the continued weakness described above, CB Richard
Ellis Services has formulated a new cost reduction program in May 2001 to
reduce operating expenses. CB Richard Ellis Services anticipates that this
program will begin to be implemented immediately with work force reductions
expected to be completed during the third quarter. This program is expected to
reduce budgeted expenses for the remainder of the year 2001 by between
approximately $35 and $40 million, excluding one-time severance costs. Expense
reductions will occur in three areas with the following estimated cost
reductions for the remainder of 2001:
. a reduction in work force combined with a hiring freeze, which are
expected to yield a savings of approximately $8 to $10 million;
. a reduction in the bonuses for senior managers worldwide, which is
expected to yield a savings of approximately $20 million; and
. a reduction in other operating and back office expenses, which is
expected to yield a savings of approximately $7 to $10 million.
108
Results of Operations
The following table sets forth items derived from CB Richard Ellis Serivces'
consolidated statements of operations for the years ended December 31, 1998,
1999 and 2000, and for the quarters ended March 31, 2000 and March 31, 2001,
presented in dollars and as a percentage of revenue:
Year Ended December 31, Quarter Ended March 31,
---------------------------------------------------------- -------------------------------
1998 1999 2000 2000 2001
---------------------- ---------------- ---------------- -------------- ---------------
(in thousands)
Revenue:
Leases................. $ 371,300 35.9% $ 448,091 36.9% $ 539,419 40.8% $ 99,753 38.2% $103,166 37.9%
Sales.................. 357,718 34.6 394,718 32.5 389,745 29.4 74,281 28.5 73,843 27.1
Property and facilities
management fees....... 86,379 8.4 110,111 9.1 110,654 8.4 25,285 9.7 27,872 10.2
Consulting and referral
fees.................. 72,586 7.0 73,569 6.1 78,714 5.9 16,314 6.2 16,367 6.0
Appraisal fees......... 48,082 4.6 71,050 5.9 75,055 5.7 16,284 6.2 18,836 6.9
Loan origination and
servicing fees........ 39,402 3.8 45,940 3.8 58,190 4.4 9,263 3.6 14,812 5.5
Investment management
fees.................. 33,145 3.2 28,929 2.4 42,475 3.2 7,337 2.8 8,549 3.1
Other.................. 25,891 2.5 40,631 3.3 29,352 2.2 12,402 4.8 9,053 3.3
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Total revenue.......... 1,034,503 100.0 1,213,039 100.0 1,323,604 100.0 260,919 100.0 272,498 100.0
Costs and expenses:
Commissions, fees and
other incentives...... 458,463 44.3 559,289 46.1 634,639 47.9 113,963 43.7 124,398 45.7
Operating,
administrative and
other................. 448,794 43.4 536,381 44.2 538,481 40.7 127,148 48.7 134,079 49.2
Depreciation and
amortization.......... 32,185 3.1 40,470 3.4 43,199 3.3 10,569 4.1 11,696 4.3
Merger-related and
other nonrecurring
charges............... 16,585 1.6 -- -- -- -- -- -- -- --
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Operating income........ 78,476 7.6 76,899 6.3 107,285 8.1 9,239 3.5 2,325 0.8
Interest income......... 3,054 0.3 1,930 0.2 2,554 0.2 489 0.2 800 0.3
Interest expense........ 31,047 3.0 39,368 3.2 41,700 3.2 9,685 3.7 9,055 3.3
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Income before provision
(benefit) for income
tax.................... 50,483 4.9 39,461 3.3 68,139 5.1 43 -- (5,930) (2.2)
Provision (benefit) for
income tax............. 25,926 2.5 16,179 1.4 34,751 2.6 23 -- (3,084) (1.1)
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
Net income (loss)....... $ 24,557 2.4% $ 23,282 1.9% $ 33,388 2.5% $ 20 -- % $ (2,846) (1.1%)
========== ===== ========== ===== ========== ===== ======== ===== ======== =====
EBITDA, excluding
merger-related and
other nonrecurring
charges................ $ 127,246 (/1/) 12.3% $ 117,369 9.7% $ 150,484 11.4% $ 19,808 7.6% $ 14,021 5.1%
========== ===== ========== ===== ========== ===== ======== ===== ======== =====
- --------
(1) EBITDA, excluding merger-related and other nonrecurring charges, for the
year ended December 31, 1998 is calculated as the sum of operating income
of $78.5 million, plus merger-related and other nonrecurring charges of
$16.6 million and depreciation and amortization of $32.2 million.
Quarter Ended March 31, 2001 Compared to Quarter Ended March 31, 2000
CB Richard Ellis Sercvices reported consolidated net loss of $2.8 million
for the quarter ended March 31, 2001 on revenue of $272.5 million compared to
consolidated net income of $0.02 million on revenues of $260.9 million for the
quarter ended March 31, 2000. These results include a nonrecurring pre-tax gain
of $5.6 million on the sale of mortgage fund management contracts during the
quarter ended March 31, 2001 compared to a $4.7 million nonrecurring pre-tax
gain on the sale of certain non-strategic assets during the quarter ended March
31, 2000.
109
Revenue on a consolidated basis increased by $11.6 million or 4.4% for the
quarter ended March 31, 2001, compared to the quarter ended March 31, 2000.
This was driven by a 59.9% increase in loan origination and servicing fees due
primarily to higher loan origination fees during the month of March. In
addition, lease revenue increased by $3.4 million, mainly as a result of the
North American operations. Property and facilities management fees, as well as
appraisal fees grew by approximately $2.6 million each. These revenue increases
were slightly offset by a decrease of $3.3 million in other revenue. The
decrease in other revenue is the result of the contribution of an engineering
services group into a separately owned joint venture during April 2000, as well
as the sale of several non-strategic assets previously included in the
management services segment. In addition, sales revenue decreased by $0.4
million due to lower revenue in the international operations, offset by higher
sales revenue in North America of $1.9 million.
Commissions, fees and other incentives totaled $124.4 million on a
consolidated basis, a 9.2% increase from the quarter ended March 31, 2000. The
increase is primarily due to higher overall commissions within the North
American operations, primarily as a result of increased revenue. Insurance and
benefit costs for producers in the United States, which are a component of
commission expense, also increased during the quarter ended March 31, 2001. The
increase in insurance and benefit costs over prior year periods should continue
throughout the remainder of the year. Producer compensation within the
international operations are typically fixed in nature compared to the North
American operations and did not decrease as a result of lower revenue. These
factors resulted in commissions as a percentage of revenue increasing from
43.7% to 45.7% in the quarter ended March 31, 2001.
Operating, administrative and other on a consolidated basis was $134.1
million, an increase of $6.9 million or 5.5% as compared to the quarter ended
March 31, 2000. This is primarily due to higher personnel requirements and
insurance and benefit costs within North America, as well as lower earnings
from unconsolidated subsidiaries during the current quarter. The quarter ended
March 31, 2001 also includes compensation expense related to the deferred
compensation plan retention program of $1.0 million, which became effective
January 2001 and accordingly, had no impact on the results of the quarter ended
March 31, 2000.
Consolidated interest expense was $9.1 million, a decrease of $0.6 million
or 6.5% from the quarter ended March 31, 2000. This decrease was primarily a
result of lower average borrowing levels during the current quarter due to the
pay down of the revolving credit facility during December 2000. In addition,
the revolving credit facility was renewed at a lower average borrowing rate
during the quarter ended March 31, 2001 as compared to the quarter ended
March 31, 2000.
The income tax benefit on a consolidated basis was $3.1 million for the
quarter ended March 31, 2001, as compared to a provision for income tax of
$0.02 million for the quarter ended March 31, 2000. The current quarter benefit
was the result of the pre-tax loss. The effective tax rate was 52.0% for the
three months ended March 31, 2001 as compared to 53.5% for the quarter ended
March 31, 2000. CB Richard Ellis Services calculates its effective tax rate
based on an estimate of our annual earnings for the entire year.
EBITDA, excluding merger-related and other nonrecurring charges, was $14.0
million for the quarter ended March 31, 2001, as compared to $19.8 million for
the quarter ended March 31, 2000. EBITDA, excluding merger-related and other
nonrecurring charges, represents earnings before net interest expense, income
taxes, depreciation and amortization of intangible assets and also excludes
merger-related and other nonrecurring charges. Management believes that the
presentation of EBITDA, excluding merger-related and other nonrecurring
charges, will enhance a reader's understanding of our operating performance and
ability to service debt as it provides a measure of cash generated, subject to
the payment of interest and income taxes, that we can use to service our debt
and for other required or discretionary purposes. Additionally, many of
CB Richard Ellis Services' debt covenants are based upon EBITDA. EBITDA,
excluding merger-related and other nonrecurring charges should not be
considered as an alternative to (a) operating income determined in accordance
with GAAP or (b) operating cash flow determined in accordance with GAAP. This
calculation of EBITDA, excluding merger-related and other nonrecurring charges
may not be comparable to similarly titled measures reported by other companies.
110
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
CB Richard Ellis Services reported a consolidated net income of $33.4
million for the year ended December 31, 2000, on revenues of $1,323.6 million
compared to a consolidated net income of $23.3 million on revenues of $1,213.0
million for the year ended December 31, 1999. The 2000 results include a $4.7
million nonrecurring pre-tax gain from its sale of select non-strategic assets.
The 1999 results include nonrecurring pre-tax gains from the sale of five non-
strategic offices and a risk management operation totaling $8.7 million, as
well as one time charges of approximately $10.2 million, the majority of which
were severance costs related to CB Richard Ellis Services' reduction in
workforce.
Revenues on a consolidated basis increased by $110.6 million or 9.1% during
the year ended December 31, 2000, compared to the year ended December 31, 1999.
The real estate market in the U.S. remained healthy in 2000, with relatively
low interest and vacancy rates. As a result, lease revenues increased by $91.3
million or 20.4% during the current year. Investment management fees increased
by $13.5 million or 46.8% and loan origination and servicing fees were higher
by $12.3 million or 26.7%. In addition, other revenues decreased by $11.3
million primarily due to the contribution of an engineering services group into
a separately owned joint venture, as well as the loss of revenue due to the
sale of assets previously included in the management services segment.
Commissions, fees and other incentives on a consolidated basis totaled
$634.6 million, an increase of $75.4 million or 13.5% for the year ended
December 31, 2000, compared to the year ended December 31, 1999. Lease
commissions increased significantly due to higher lease revenue. In addition,
the overall revenue growth resulted in higher variable commission expense as
compared to the prior year. Variable commissions increase as a percentage of
revenue as select earnings levels are met. During 2000, a greater number of
high level producers earned a larger proportion of total revenues. This
contributed to an increase in commissions as a percentage of revenue from 46.1%
to 47.9% for 2001.
Operating, administrative and other on a consolidated basis was $538.5
million, an increase of $2.1 million or 0.4% for the year ended December 31,
2000, compared to prior year. This increase is due to higher bonus incentives
and profit share driven by the improved current year results, offset by lower
salary requirements in North America. As a percentage of revenue, operating,
administrative and other was 40.7% for the year ended December 31, 2000,
compared to 44.2% for the year ended December 31, 1999. The decreased
percentage is due to CB Richard Ellis Services' focus on higher margin lines of
business, as well as an improvement in its operational efficiency through cost
containment measures.
Consolidated interest expense was $41.7 million, an increase of $2.3 million
or 5.9% for the year ended December 31, 2000, as compared to the year ended
December 31, 1999. The increase resulted from higher interest rates for the
revolving credit facility, offset in part by lower average borrowing levels
during 2000. Overall, CB Richard Ellis Services reduced its outstanding long-
term debt by $50.5 million or 13.8% as compared to December 31, 1999, helping
to minimize the impact of the increased interest rates during 2000.
Provision for income tax on a consolidated basis was $34.8 million for the
year ended December 31, 2000, as compared to the provision for income tax of
$16.2 million for the year ended December 31, 1999. The increase is mainly due
to higher pre-tax income and a lower release of valuation allowance during the
current year. The effective tax rate was 51.0% for the current year as compared
to 41.0% for the prior year. The increase in the effective tax rate is
primarily due to a decrease in the release of valuation allowances from
$6.3 million to $3.0 million in the current year. Valuation allowances over the
past two years have been released as it has become more likely than not that CB
Richard Ellis Services would realize additional deferred tax assets.
EBITDA, excluding merger-related and other nonrecurring charges, was $150.5
million for the year ended December 31, 2000, as compared to $117.4 million for
the year ended December 31, 1999, with EBITDA, excluding merger-related and
other nonrecurring charges, as a percentage of revenue, increasing from 9.7% in
1999 to 11.4% in 2000. There were no merger-related or other nonrecurring
charges in 2000 and 1999.
111
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
CB Richard Ellis Services reported a consolidated net income of $23.3
million for the year ended December 31, 1999, on revenues of $1,213.0 million
compared to a consolidated net income of $24.6 million on revenues of $1,034.5
million for the year ended December 31, 1998. However, including the $32.3
million deemed dividend resulting from the accounting treatment of the
preferred stock repurchase, the 1998 net loss applicable to common stockholders
was $7.7 million. The 1999 result includes nonrecurring gains of $8.7 million
from the sale of five non-strategic offices and a risk management operation and
one-time charges of approximately $10.2 million, the majority of which were
severance costs related to CB Richard Ellis Services' reduction in workforce.
Revenues on a consolidated basis were $1,213.0 million, an increase of
$178.5 million or 17.3% for the year ended December 31, 1999, compared to the
year ended December 31, 1998. The overall increase related to the continued
improvement in commercial real estate markets across the U.S. as reflected in
increased lease transactions, as well as the full contribution from REI,
Hillier Parker and various other 1998 acquisitions. Additionally, CB Richard
Ellis Services continued to benefit from its global market presence by
leveraging its ability to deliver comprehensive real estate services into new
businesses.
Commissions, fees and other incentives on a consolidated basis were $559.3
million, an increase of $100.8 million or 22.0% for the year ended December 31,
1999, compared to the year ended December 31, 1998. The increase in these costs
is attributable to an increase in revenue and includes the impact of a new
commission-based program, which enables sales professionals to earn additional
commission over a particular revenue threshold. The increase is also due to the
full year contribution from REI and Hillier Parker and various other 1998
acquisitions.
Operating, administrative and other on a consolidated basis was $536.4
million, an increase of $87.6 million or 19.5% for the year ended December 31,
1999, compared to the year ended December 31, 1998. As a percentage of revenue,
operating, administrative and other increased slightly to 44.2% for the year
ended December 31, 1999, compared to 43.4% for the year ended December 31,
1998. The increase is due primarily to the acquisitions of REI and Hillier
Parker.
Consolidated interest expense was $39.4 million, an increase of $8.3 million
or 26.8% for the year ended December 31, 1999, as compared to the year ended
December 31, 1998. The increase resulted from the renewal of select senior term
loans at a higher borrowing rate as well as higher borrowing levels during
1999.
Provision for income tax on a consolidated basis was $16.2 million for the
year ended December 31, 1999, as compared to the provision for income tax of
$25.9 million for the year ended December 31, 1998. The decrease is primarily
due to the decrease in income before provision for income tax. In addition, CB
Richard Ellis Services released $6.3 million valuation allowances as it became
evident that it was more likely than not that it would realize additional
deferred tax assets, resulting in a decrease in the effective tax rate. In
early 1998, CB Richard Ellis Services repurchased its outstanding preferred
stock which triggered a limitation on the annual amount of net operating losses
it can use to offset future U.S. taxable income. This limitation does not
affect the way taxes are reported for financial reporting purposes, but it does
affect the timing of the actual amount of taxes paid on an annual basis.
EBITDA, excluding merger-related and other nonrecurring charges, was $117.4
million for the year ended December 31, 1999, as compared to $127.2 million for
the year ended December 31, 1998. EBITDA, excluding merger-related and other
nonrecurring charges, excludes merger related charges of $16.6 million in 1998
relating to CB Richard Ellis Services' acquisition of REI, Ltd. and Hillier
Parker May and Rowden.
112
Segment Operations
CB Richard Ellis Services provides integrated real estate services through
three global business segments: transaction management, financial services and
management services. The factors for determining the reportable segments were
based on (1) the type of service and client and (2) the way the chief operating
decision-makers organize segments internally for making operating decisions and
assessing performance. The transaction management segment consists of sales,
leasing and consulting services in connection with commercial real estate,
transaction management and advisory services for large corporate clients and
investment property services, including brokerage services for commercial real
estate property marketed for sale to institutional and private investors. The
financial services segment consists of commercial loan origination and
servicing through CB Richard Ellis Services' wholly-owned subsidiary, L.J.
Melody, investment management services through its wholly-owned subsidiary,
CBRE Investors, and valuation and appraisal services. Management services
provides facilities, property and construction management services. Results for
the quarter ended March 31, 2001 for the financial services segment includes a
$5.6 million nonrecurring pre-tax gain from the sale of mortgage fund
management contracts. For the quarter ended March 31, 2000, the management
services segment results included a $4.7 million nonrecurring pre-tax gain from
the sale of certain non-strategic assets. The 2000 results for the financial
services segment include a $5.3 million pre-tax gain from the sale of loan
servicing rights. The 1999 results include a nonrecurring pre-tax gain from the
sale of five non-strategic offices and a risk management operation totaling
$8.7 million. In July 1999, CB Richard Ellis Services changed its segment
reporting from four segments to three segments. Prior periods have been
restated to conform to the new segmentation. The following table summarizes CB
Richard Ellis Services' revenue, operating income, EBITDA, excluding
merger-related and other nonrecurring charges and EBITDA margin by operating
segment for the years ended December 31, 1998, 1999 and 2000, and for the
quarters ended March 31, 2000 and March 31, 2001:
113
Year Ended December 31, Three Months Ended March 31,
--------------------------------------------------- ------------------------------
1998 1999 2000 2000 2001
------------------- -------------- -------------- ------------- ---------------
(dollars in thousands)
Transaction Management
Revenue:
Leases................. $352,811 46.2% $426,108 48.4% $510,287 53.7% $94,304 52.8% $ 97,215 54.0 %
Sales.................. 330,206 43.3 383,726 43.5 378,486 39.8 71,922 40.3 70,303 39.1
Other consulting and
referral fees (1)..... 79,934 10.5 71,095 8.1 61,479 6.5 12,233 6.9 12,463 6.9
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Total revenue........ 762,951 100.0 880,929 100.0 950,252 100.0 178,459 100.0 179,981 100.0
Costs and expenses:
Commissions, fees and
other incentives...... 405,393 53.1 477,057 54.2 542,248 57.1 94,912 53.2 101,622 56.5
Operating,
administrative and
other................. 262,604 34.4 314,814 35.7 303,357 31.9 73,965 41.4 76,342 42.4
Depreciation and
amortization.......... 13,722 1.8 20,676 2.3 21,342 2.2 4,951 2.8 6,147 3.4
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Operating income (2)... $ 81,232 10.7% $ 68,382 7.8% $ 83,305 8.8% $ 4,631 2.6% $ (4,130) (2.3)%
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
EBITDA................. $ 94,954 12.5% $ 89,058 10.1% $104,647 11.0% $ 9,582 5.4% $ 2,017 1.1 %
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
Financial Services
Revenue:
Appraisal fees......... $ 48,090 33.1% $ 69,007 38.9% $ 72,861 34.0% $15,941 38.5% $ 18,368 32.8 %
Loan origination and
servicing fees........ 39,402 27.1 45,938 25.9 58,188 27.2 9,230 22.3 14,812 26.5
Investment management
fees.................. 32,591 22.4 27,323 15.4 40,433 18.9 6,717 16.2 7,969 14.3
Other (1).............. 25,167 17.4 35,059 19.8 42,622 19.9 9,509 23.0 14,770 26.4
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Total revenue........ 145,250 100.0 177,327 100.0 214,104 100.0 41,397 100.0 55,919 100.0
Costs and expenses:
Commissions, fees and
other incentives...... 41,491 28.6 59,294 33.5 65,058 30.4 12,207 29.5 15,743 28.2
Operating,
administrative and
other................. 85,885 59.1 100,201 56.5 119,333 55.7 25,405 61.4 30,081 53.8
Depreciation and
amortization.......... 11,025 7.6 10,719 6.0 12,001 5.6 2,980 7.2 3,246 5.8
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Operating income (2)... $ 6,849 4.7% $ 7,113 4.0% $ 17,712 8.3% $ 805 1.9% $ 6,849 12.2 %
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
EBITDA................. $ 17,874 12.3% $ 17,832 10.1% $ 29,713 13.9% $ 3,785 9.1% $ 10,095 18.1 %
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
Management Services
Revenue:
Property management
fees.................. $ 67,300 53.3% $ 79,994 51.7% $ 83,251 52.3% $19,234 46.8% $ 20,337 55.6 %
Facilities management
fees.................. 17,219 13.6 25,597 16.5 23,069 14.5 5,291 12.9 6,881 18.8
Other (1).............. 41,783 33.1 49,192 31.8 52,928 33.2 16,538 40.3 9,380 25.6
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Total revenue........ 126,302 100.0 154,783 100.0 159,248 100.0 41,063 100.0 36,598 100.0
Costs and expenses:
Commissions, fees and
other incentives...... 11,579 9.2 22,938 14.8 27,333 17.2 6,844 16.7 7,033 19.2
Operating,
administrative and
other................. 100,305 79.4 121,366 78.4 115,791 72.7 27,778 67.6 27,656 75.6
Depreciation and
amortization.......... 7,438 5.9 9,075 5.9 9,856 6.2 2,638 6.4 2,303 6.3
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Operating income (2)... $ 6,980 5.5% $ 1,404 0.9% $ 6,268 3.9% $ 3,803 9.3% $ (394) (1.1)%
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
EBITDA................. $ 14,418 11.4% $ 10,479 6.8% $ 16,124 10.1% $ 6,441 15.7% $ 1,909 5.2 %
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
Merger-related and other
nonrecurring charges... $ 16,585 $ -- $ --
======== ======== ========
Total operating income.. $ 78,476 $ 76,899 $107,285 $ 9,239 $ 2,325
======== ======== ======== ======= ========
Total EBITDA, excluding
merger-related and
other nonrecurring
charges................ $127,246(/3/) $117,369 $150,484 $19,808 $ 14,021
======== ======== ======== ======= ========
- --------
(1) Revenue is allocated by material line of business specific to each segment.
"Other" includes types of revenue that have not been broken out separately
due to their immaterial balances and/or nonrecurring nature within each
segment. Certain revenue types disclosed on the consolidated statements of
operations may not be derived directly from amounts shown in this table.
(2) Segment operating income excludes merger-related and other nonrecurring
charges.
(3) EBITDA, excluding merger-related and other nonrecurring charges, for the
year ended December 31, 1998 is calculated as the sum of operating income
of $78.5 million, merger-related and other nonrecurring charges of $16.6
million and depreciation and amortization of $32.2 million.
114
Quarter Ended March 31, 2001 Compared to Quarter Ended March 31, 2000
Transaction Management
Revenue increased by $1.5 million or 0.9% for the quarter ended March 31,
2001, compared to the quarter ended March 31, 2000. This increase was primarily
due to higher lease revenue in North America as a result of a greater number of
total transactions executed during the quarter ended March 31, 2001, as well as
a larger dollar average per transaction. This was offset by a 2.3% drop in
sales revenue primarily due to lower revenue in France. In addition, Singapore
had reduced sales revenue due to a lower number of deals completed as a result
of economic and political problems in neighboring countries. These decreases
were slightly offset by a greater number of investment property sales within
North America. Commissions, fees and other incentives increased by $6.7 million
or 7.1% for the quarter ended March 31, 2001, compared to the quarter ended
March 31, 2000, primarily due to the increased lease and sales revenue within
the North American operations. The overall revenue growth also resulted in
higher variable commission expense within the North American operation compared
to the prior year. Producers earn an increased percentage of commissions as
certain revenue targets are met. Insurance and benefits for producers, which
are a component of commission expense, increased primarily in the United States
compared to the quarter ended March 31, 2000. In addition, producer
compensation within the international operations is typically fixed in nature
and do not decrease as a result of lower revenue. These factors contributed to
an increase in commissions as a percentage of revenue from 53.2% to 56.5% for
the quarter ended March 31, 2001. Operating, administrative, and other
increased by $2.4 million or 3.2% for the quarter ended March 31, 2001,
compared to the quarter ended March 31, 2000. This increase is mainly related
to higher personnel requirements, increased insurance and benefit costs, and
current quarter compensation expense related to the deferred compensation plan
retention program within North America.
Financial Services
Revenue increased by $14.5 million or 35.1% for the quarter ended March 31,
2001, compared to the quarter ended March 31, 2000. Loan origination and
servicing fees increased by $5.6 million. Excluding any acquisitions, loan
origination fees increased by $5.0 million or 54.2% over the quarter ended
March 31, 2000, while loan servicing fees increased slightly compared to the
quarter ended March 31, 2000. Appraisal fees increased by $2.4 million.
Investment management fees increased 18.6% as assets under management grew by
$868.3 million as compared to the quarter ended March 31, 2000. Other revenue
increased by $5.3 million due to the gain on the sale of mortgage fund
management contracts during the current quarter. Commissions, fees and other
incentives increased by $3.5 million or 29.0% for the quarter ended March 31,
2001, compared to the quarter ended March 31, 2000 due to higher loan and
appraisal commissions as a result of the increased revenues. Operating,
administrative and other increased by $4.7 million or 18.4% for the quarter
ended March 31, 2001, compared to the quarter ended March 31, 2000. This
increase is primarily due to the start-up of the investment management
operations in Asia Pacific during 2000, which as a result, had limited activity
compared to the current period. The mortgage banking line of business had
higher personnel, bonus and long-term incentive costs attributable to the more
favorable quarter ended March 31, 2001 results. In addition, earnings from
unconsolidated subsidiaries decreased for the quarter ended March 31, 2001 as
compared to the quarter ended March 31, 2000.
Management Services
Revenue decreased by $4.5 million or 10.9% for the quarter ended March 31,
2001, compared to the quarter ended March 31, 2000. Other revenue decreased by
$7.2 million due to the gain on the sale of certain non-strategic assets in the
quarter ended March 31, 2000. The decline in other revenue is also the result
of the contribution of an engineering services group into a separately owned
joint venture during April 2000, as well as the sale of other non-strategic
assets during the prior year. This operation generated $1.8 million of revenue
during the first quarter of 2000. This was offset by increased property and
facility management fees primarily due to higher square footage managed in the
United States and India.
115
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Transaction Management
Revenue increased by $69.3 million or 7.9% for the year ended December 31,
2000, compared to the year ended December 31, 1999. This increase was primarily
due to higher lease revenue in North America as a result of a greater number of
total transactions executed during 2000, as well as a larger dollar average per
transaction. Europe reported increased lease revenues primarily due to strong
performances in France and the United Kingdom, as well as expanded operations
in Netherlands and Spain. Increased lease revenues in Asia Pacific are due to a
better overall economy in China, as well as improved financial performance in
Australia. Sales revenues decreased slightly from the prior year, primarily due
to higher interest rates and a weak currency in Australia. Commissions, fees
and other incentives increased by $65.2 million or 13.7% for the year ended
December 31, 2000, compared to the year ended December 31, 1999, primarily due
to an increase in lease revenues. In addition, the overall revenue growth
resulted in a higher variable commission expense compared to prior year.
Commissions are directly correlated to revenue in the transaction management
segment. During 1999, the commission program was amended to increase the
percentage of revenue a producer can earn as commission as the producer meets
certain revenue targets. Under the new program, when a producer achieves a
revenue target, the percentage of commission increases on a retroactive basis.
As a producer achieves each revenue target, the percentage of commission
increases on a retroactive basis. This motivates producers to reach higher
revenue targets. During 2000, a greater number of producers generated a larger
proportion of revenue at the higher revenue targets. This contributed to an
increase in commissions as a percentage of revenue from 54.2% to 57.1% for
2000. Operating, administrative and other decreased by $11.5 million or 3.6%
for the year ended December 31, 2000, compared to the year ended December 31,
1999. This decrease is mainly related to lower personnel requirements in North
America due to cost containment measures, as well as higher equity income from
unconsolidated subsidiaries during 2000. This is slightly offset by increased
bonus incentives and profit share due to the more favorable results.
Financial Services
Revenue increased by $36.8 million or 20.7% for the year ended December 31,
2000, compared to the year ended December 31, 1999. Investment management fees
grew by 48.0% due to a higher volume of managed assets, as well as increased
incentive fees from several properties in North America and Asia. Loan
origination and servicing fees increased by $12.3 million, of which $3.7
million is attributable to the acquisitions of Boston Mortgage Capital
Corporation in late 2000 and Eberhardt Company in late 1999. In addition,
excluding any acquisitions, loan production fees increased by $5.9 million or
18.4% over prior year, while loan servicing fees increased by $2.6 million or
21.7%. Other revenue increased due to the acquisition of several small
consulting companies in late 1999 and early 2000. Commissions, fees and other
incentives increased by $5.8 million or 9.7% for the year ended December 31,
2000, compared to the year ended December 31, 1999, due primarily to higher
loan commissions. Operating, administrative and other increased by $19.1
million or 19.1% for the year ended December 31, 2000, compared to the year
ended December 31, 1999, mainly due to increased personnel requirements as a
result of expanded investment management operations in North America and Asia
Pacific and higher bonus incentives and profit share attributable to the more
favorable current year results. In addition, earnings from unconsolidated
subsidiaries decreased for 2000 as compared to the same period in the prior
year. The 2000 results for the financial services segment include a
$5.3 million pre-tax gain from the sale of loan servicing rights.
Management Services
Revenue increased by $4.5 million or 2.9% for the year ended December 31,
2000, compared to the year ended December 31, 1999, due to higher lease and
sales revenues. In addition, property management fees increased primarily due
to higher square footage managed in India and Australia. This was slightly
offset by lower facilities management fees due to the loss of a major client at
the beginning of 2000. Commissions, fees and other incentives increased by $4.4
million or 19.2% for the year ended December 31, 2000, compared to
116
the year ended December 31, 1999, attributable mainly to the higher sales and
lease commissions. Operating, administrative and other decreased $5.6 million
or 4.6% for the year ended December 31, 2000, compared to the year ended
December 31, 1999. The decline is mainly due to lower personnel requirements
due to cost containment measures and higher equity income in unconsolidated
subsidiaries in North America. As a percentage of revenue, operating expenses
decreased from 78.4% to 72.7% for 2000. The 2000 results include a $4.7 million
pre-tax gain from the sale of certain non-strategic assets.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Transaction Management
Revenue increased by $118.0 million or 15.5% for the year ended December 31,
1999, compared to the year ended December 31, 1998, mainly due to the continued
improvement of the real estate market, mainly in brokerage leasing services and
the full year contribution of REI, Hillier Parker and the various other 1998
acquisitions. Commissions, fees and other incentives increased by $71.7 million
or 17.7% for the year ended December 31, 1999, compared to the year ended
December 31, 1998, primarily due to the increase in revenue. This also includes
the impact of a new commission-based program which enables sales professionals
to earn additional commission over a particular revenue threshold, as well as
the full year contribution from REI, Hillier Parker and the various other 1998
acquisitions. Operating, administrative and other increased by $52.2 million or
19.9% for the year ended December 31, 1999, compared to the year ended December
31, 1998, primarily due to the full year inclusion of REI, Hillier Parker, and
the various other 1998 acquisitions. Depreciation and amortization increased by
$7.0 million or 50.7% for the year ended December 31, 1999, as compared to the
year ended December 31, 1998, primarily as a result of additional investments
in computer hardware and software to support the increase in new business.
Financial Services
Revenue increased by $32.1 million or 22.1% for the year ended December 31,
1999, compared to the year ended December 31, 1998. The increase in revenue is
primarily due the full year contribution of REI, Hillier Parker and the various
other 1998 acquisitions, resulting in increased appraisal and valuation fees.
Commissions, fees and other incentives increased by $17.8 million or 42.9% for
the year ended December 31, 1999, compared to the year ended December 31, 1998.
The increase is primarily a result of the revenue increase. Operating,
administrative and other increased by $14.3 million or 16.7% for the year ended
December 31, 1999, compared to the year ended December 31, 1998, mainly as a
result of the integration of REI, Hillier Parker and the various other 1998
acquisitions.
Management Services
Revenue increased by $28.5 million or 22.5% for the year ended December 31,
1999, compared to the year ended December 31, 1998, primarily due to growth in
the facilities management businesses, as well as the full contribution of REI,
Hillier Parker and the various other 1998 acquisitions. Commissions, fees and
other incentives increased by $11.4 million or 98.1% for the year ended
December 31, 1999, compared to the year ended December 31, 1998, due to the
higher revenues as a result of the REI, Hillier Parker acquisitions and the
various other 1998 acquisitions. Operating, administrative and other increased
$21.1 million or 21.0% for the year ended December 31, 1999, compared to the
year ended December 31, 1998, primarily related to the acquisitions of REI and
Hillier Parker and the investment in infrastructure to expand the business.
Depreciation and amortization increased by $1.6 million or 22.0% for the year
ended December 31, 1999, as compared to the year ended December 31, 1998,
primarily as a result of the acquisitions of REI, Hillier Parker and the
various other 1998 acquisitions.
117
Quarterly Financial Information
A significant portion of CB Richard Ellis Services' revenue is seasonal.
Historically, this seasonality has caused its revenue, operating income, net
income and cash flow from operating activities to be substantially lower in the
first three calendar quarters and higher in the fourth calendar quarter. The
concentration of earnings and cash flow in the fourth quarter is due to an
industry wide focus on completing transactions at year-end while incurring
constant, non-variable expenses throughout the year. This has historically
resulted in a small operating loss in the first quarter, a small operating
profit or loss in the second and third quarters, and a larger profit in the
fourth quarter.
The following table presents CB Richard Ellis Services' revenue, gross
profit, operating income and EBITDA by operating segment for each of the nine
quarters in the period from January 1, 1999 through March 31, 2001. The
information for each of these quarters is unaudited and has been prepared on
the same basis as CB Richard Ellis Services' audited consolidated financial
statements appearing elsewhere in this prospectus. In the opinion of
management, all necessary adjustments, consisting only of normal recurring
adjustments, have been included to present fairly the unaudited quarterly
results when read in conjunction with CB Richard Ellis Services' audited
consolidated financial statements and related notes appearing elsewhere in this
prospectus.
Quarter Ended
------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1999 1999 1999 1999 2000 2000 2000 2000 2001
-------- -------- --------- -------- -------- -------- --------- -------- --------
(in thousands)
Revenue
Transaction
management............ $159,135 $198,171 $225,099 $298,524 $178,459 $230,222 $232,695 $308,876 $179,981
Financial services..... 37,945 41,802 42,923 54,657 41,397 51,375 56,139 65,193 55,919
Management services.... 36,121 37,194 38,996 42,472 41,063 36,287 37,687 44,211 36,598
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenue.......... $233,201 $277,167 $307,018 $395,653 $260,919 $317,884 $326,521 $418,280 $272,498
======== ======== ======== ======== ======== ======== ======== ======== ========
Year to year revenue
growth percentage..... 33.1% 8.6% 12.1% 19.8% 11.9% 14.7% 6.4% 5.7% 4.4%
Operating Income (Loss)
Transaction
management............ $ 2,337 $ 13,776 $ 20,826 $ 31,443 $ 4,631 $ 18,344 $ 17,261 $ 43,069 $ (4,130)
Financial services..... 2,955 1,753 (344) 2,749 805 4,578 6,590 5,739 6,849
Management services.... (216) 1,051 (436) 1,005 3,803 (377) 1,033 1,809 (394)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating
income................ $ 5,076 $ 16,580 $ 20,046 $ 35,197 $ 9,239 $ 22,545 $ 24,884 $ 50,617 $ 2,325
======== ======== ======== ======== ======== ======== ======== ======== ========
Operating margin
percentage............ 2.2% 6.0% 6.5% 8.9% 3.5% 7.1% 7.6% 12.1% 0.9%
EBITDA
Transaction
management............ $ 6,951 $ 19,139 $ 26,595 $ 36,373 $ 9,582 $ 23,381 $ 23,213 $ 48,471 $ 2,017
Financial services..... 5,725 4,771 1,766 5,570 3,785 7,623 9,513 8,792 10,095
Management services.... 2,394 2,638 1,686 3,761 6,441 2,272 2,992 4,419 1,909
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total EBITDA........... $ 15,070 $ 26,548 $ 30,047 $ 45,704 $ 19,808 $ 33,276 $ 35,718 $ 61,682 $ 14,021
======== ======== ======== ======== ======== ======== ======== ======== ========
EBITDA margin
percentage............ 6.5% 9.6% 9.8% 11.6% 7.6% 10.5% 10.9% 14.7% 5.1%
Liquidity and Capital Resources
CB Richard Ellis Services' principal capital requirements are to fund
working capital needs, to meet required debt payments, to make co-investments
in real estate funds where it acts as general partner, to make other
investments in real estate related activities, to upgrade technology and
computers and the facilities of its offices and to make small acquisitions.
CB Richard Ellis Services' Historical Liquidity and Capital Resources
Operating Cashflows. Net cash used in operating activities for the first
quarter of 2001 was $104.3 million, an increase of $36.7 million over the first
quarter of 2000 mainly due to increased payments for 2000 bonuses and profit
sharing, made in the current quarter. This increase is due to CB Richard Ellis
Services' better financial
118
results for 2000 as compared to 1999. Income tax payments also increased by
$9.2 million during the quarter ended March 31, 2001. CB Richard Ellis
Services' operating cashflow increased by $10.1 million in 2000 over the year
ended 1999, primarily due to higher net income adjusted for non-cash items. In
addition, receivables increased at a lower rate during 2000, due to a greater
emphasis on receivable collections.
Investing Cashflows. CB Richard Ellis Services utilized $0.5 million for
investing activities during the first quarter of 2001, compared to cash
provided of $6.3 million in the first quarter of 2000. During the year ended
2000, it utilized $35.7 million for investing activities, an increase of $9.0
million over the prior year. This increase was primarily due to its $21.0
million investment in several technology companies as part of its overall e-
business strategy. CB Richard Ellis Services' e-investment strategy is designed
to improve internal business operations with resulting cost savings through
paperwork reduction, to improve service delivery to clients and to create value
in growth businesses that will flow back to us. In addition, as of March 31,
2001, it had committed an additional $40.6 million to fund future co-
investments. CB Richard Ellis Services' participation in real estate
transactions through co-investment activity could increase fluctuations in its
earnings and cash flow.
During the quarter ended March 31, 2001, CB Richard Ellis Services received
$6.1 million in proceeds primarily from the sale of mortgage fund management
contracts. Proceeds for the quarter ended March 31, 2000 totaled $11.3 million
due to the sale of certain non-strategic assets in the management services
segment, as well as the receipt of proceeds in 2000 from the 1999 sale of a
risk management operation. During the year ended 2000, it received $17.5
million in proceeds primarily from the sale of select assets within the
management services segment, the sale of loan servicing rights and the receipt
of proceeds in 2000 from the 1999 sale of a risk management operation. This was
slightly lower than the 1999 proceeds of $19.4 million received. This included
$7.4 million received from the sale of inventoried property, plus $12.1 million
primarily received from the sale of the headquarters building in downtown Los
Angeles, California, and a small office building in Phoenix, Arizona.
In addition, capital expenditures increased by $2.1 million from the quarter
ended March 31, 2000 to the quarter ended March 31, 2001. However, capital
expenditures decreased from $35.1 million for the year ended December 31, 1999,
to $26.9 million in the year ended December 31, 2000. Capital expenditures for
1998 totaled $29.7 million. Expenditures in 2000 mainly related to the purchase
of computer hardware and software. Higher purchases in 1999 as compared to 2000
and 1998 related to CB Richard Ellis Services' efforts to prepare for year 2000
computer hardware and software systems issues. CB Richard Ellis Services
expects to have capital expenditures ranging from $20 to $25 million in 2001.
Financing Cashflows. Net cash provided by financing activities was $104.9
million for the quarter ended March 31, 2001, compared to $58.8 million for the
quarter ended March 31, 2000, and was mainly attributable to an increased
balance in CB Richard Ellis Services' revolving credit facility, used primarily
to fund the payment of bonuses and profit sharing. Net cash used in financing
activities was $53.5 million for the year ended December 31, 2000, compared to
$37.7 million for the year ended December 31, 1999, and was mainly attributable
to the repayment of debt. From time to time, CB Richard Ellis Services has
purchased stock on the open market to fulfill its obligations under stock
option, deferred compensation and other similar stock-based compensation plans.
For the year ended December 31, 2000, CB Richard Ellis Services repurchased
185,800 shares of common stock for $2.0 million in order to minimize the
dilutive effect of its obligation to issue stock under the deferred
compensation plan. During 1999, CB Richard Ellis Services repurchased a total
of 397,450 shares of common stock for $5.0 million to minimize the dilution
from the grant of options and stock purchase rights. The 1999 stock repurchase
program was completed on January 5, 2000. As a result of the merger and the
related adjustments to the deferred compensation plan, CB Richard Ellis
Services does not currently have any plans to make future purchases of shares
of its common stock to fulfill obligations under its employee compensation
plans.
Outlook. During the first quarter of 2001, the U.S. economy in general and
certain local and regional U.S. economies in particular continued to experience
economic softness. Many businesses, including CB
119
Richard Ellis Services' customers, have implemented staff reductions and
delayed or curtailed their plans and commitments with respect to their
commercial real estate needs. Additionally, lease rates in various regions,
particularly those with a concentration in the telecommunication and technology
industries, began to decline.
CB Richard Ellis Services' first quarter results reflected a strong January
followed by a slowdown in its U.S. sales activities beginning in February and a
slowdown in U.S. lease activities beginning in March, as well as lower than
expected revenues in Europe and Asia Pacific. This weakness in sales and lease
activities has continued into the second quarter. Internal results indicate
that CB Richard Ellis Services' operating results for the second quarter ending
June 30, 2001 will be considerably below its operating results for the second
quarter ending June 30, 2000.
Following its last major cost reduction program in 1999, CB Richard Ellis
Services has continued to evaluate its operating expenses relative to its
performance. In response to the continued weakness described above, CB Richard
Ellis Services has formulated a new cost reduction program in May 2001 to
reduce operating expenses. This program is currently being implemented with
work force reductions expected to be completed during the third quarter. This
program is expected to reduce budgeted expenses for the remainder of the year
2001 by between approximately $35 to $40 million, excluding one-time severance
costs. Expense reductions will occur in three areas with the following
estimated cost reductions for the remainder of 2001:
. a reduction in work force combined with a hiring freeze, which are
expected to yield a savings of approximately $8 to $10 million;
. a reduction in the bonuses for senior managers worldwide, which is
expected to yield a savings of approximately $20 million; and
. a reduction in other operating and back office expenses, which is
expected to yield a savings of approximately $7 to $10 million.
In addition, in the second quarter, CB Richard Ellis Services wrote off its
$2.9 million investment in Eziaz, which has recently declared bankruptcy.
Liquidity and Capital Resources After the Merger
Financing to be Obtained in Connection with the Merger. In connection with
the merger and related transactions, CB Richard Ellis Services will enter into
a senior secured credit agreement with Credit Suisse First Boston and other
lenders and borrow up to $225.0 million in term loans under this agreement. The
credit agreement will also include a $100.0 million revolving credit facility,
a portion of which will be drawn upon at the time of the merger. In addition,
we will issue and sell at least $65.0 million aggregate principal amount of 16%
senior notes due 2011 and related Class A common stock to DLJ Investment
Funding, Inc. and the other purchasers of our senior notes and the related
Class A common stock. Also in connection with the merger, CB Richard Ellis
Services will assume $229 million aggregate principal amount of 11 1/4% Senior
Subordinated Notes due 2011 of BLUM CB Corp., which were issued and sold for
approximately $225.6 million on June 7, 2001. The net proceeds from the sale of
those notes by BLUM CB Corp. are currently being held in an escrow account and
will be released when the merger is completed. If the merger had occurred on
March 31, 2001, on a pro forma basis we would have incurred an aggregate of
$554.0 million of indebtedness, excluding any additional borrowings under the
revolving credit facility that would have been required to finance our working
capital needs.
Also in connection with the merger, the BLUM Funds will make a cash
contribution to CBRE Holding of at least approximately $40.9 million. The BLUM
Funds have agreed to purchase for cash immediately prior to the merger a
minimum of 2,553,879 shares of CBRE Holding Class B common stock at $16.00 per
share. In addition, the BLUM Funds have agreed to purchase for $16.00 per share
in cash an additional number of shares of Class B common stock equal to (1)
3,236,639 shares minus (2) the number of shares subscribed for in the offerings
plus (3) the aggregate amount of full-recourse notes delivered by designated
managers in payment for shares of Class A common stock divided by $16.00. The
number of shares purchased by the BLUM Funds will
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be reduced by 241,885 shares, which is the sum of the 10 shares of CBRE Holding
common stock initially owned by RCBA Strategic and the 241,875 shares of CBRE
Holding common stock purchased by RCBA Strategic for $16.00 per share in
connection with the closing of the sale of 11 1/4% senior subordinated notes by
BLUM CB Corp. as described above. The proceeds from the sale of those shares to
RCBA Strategic were contributed to BLUM CB Corp., which deposited the proceeds
in an escrow account for release when the merger and related transactions are
completed. If the offerings of shares of our Class A common stock and stock
fund units being made by this prospectus are fully subscribed, CBRE Holding
expects to receive net cash proceeds of approximately $33.7 million after the
payment of fees and expenses associated with the offerings.
Using a portion of the proceeds from the sale of the senior notes and
related Class A common stock and the 11 1/4% senior subordinated notes, the
borrowings under the new credit agreement and the proceeds from the sale of our
Class B common stock to the BLUM Funds and our Class A common stock in the
offerings, CB Richard Ellis Services will repay substantially all of its long-
term indebtedness outstanding immediately prior to the merger. The repaid
indebtedness of CB Richard Ellis Services will include the amounts outstanding
under its existing credit agreement.
On May 25, 2001, CB Richard Ellis Services commenced a consent solicitation
to amend the indenture governing its outstanding 8 7/8% senior subordinated
notes and a tender offer to purchase all of its outstanding 8 7/8% senior
subordinated notes. Any holders that consent to the amendment of the indenture
and agree to sell their 8 7/8% senior subordinated notes will be paid at the
time of the merger, and all 8 7/8% senior subordinated notes that are not
tendered for payment will remain outstanding after the merger. The total
outstanding amount of 8 7/8% senior subordinated notes remaining at the time of
the merger will reduce the amount of the term loans that we incur under the new
senior secured credit agreement by an equivalent amount. At 5:00 p.m. New York
City time on June 8, 2001 the consent solicitation period for the 8 7/8% senior
subordinated notes expired. As of that time, a majority of the holders of 8
7/8% senior subordinated notes had consented to the amendments to the indenture
and had tendered their notes. Accordingly, CB Richard Ellis Services intends
promptly to execute a supplemental indenture, which will include amendments
that substantially modify or eliminate the restrictive covenants in the
indenture. Also on June 8, 2001 CB Richard Ellis Services extended its offer to
purchase the 8 7/8% senior subordinated notes through 12:00 noon New York City
time on July 18, 2001.
Also using a portion of the proceeds described above CB Richard Ellis
Services will pay $16.00 in cash per share of CB Richard Ellis Services' common
stock that is outstanding at the time of the merger and not owned by the buying
group, as well as cash to holders of options to acquire shares of CB Richard
Ellis Services common stock that agree to have their options canceled in
exchange for a cash payment. We estimate that the aggregate amount of cash that
CB Richard Ellis Services will pay to holders of its common stock and options
in connection with the merger will be approximately $201.0 million.
Financing Our Operations after the Merger. After the closing of the merger,
we expect to finance our operations, non-acquisition related capital
expenditures, employee compensation plan obligations and long-term indebtedness
repayment obligations described below primarily with internally generated cash
flow and borrowings under the new revolving credit facility of CB Richard Ellis
Services. We expect to fund our future acquisitions, if any, that require cash
with internally generated cash flow, but any such acquisition may require new
sources of capital such as the issuance of additional debt or equity. We
anticipate that our existing sources of liquidity, including cash flow from
operations, will be sufficient to meet our anticipated non-acquisition cash
requirements for the foreseeable future and in any event for at least the next
twelve months. Because the BLUM Funds have agreed in the contribution and
voting agreement to make a cash contribution to us equal to the amount that the
offerings being made by this prospectus are not subscribed for, we are not
dependent upon the success of the offerings being made by this prospectus to
maintain adequate liquidity.
During the year 2002, we estimate that our non-operations capital
expenditures will be no greater than $20 million and that we will fund
approximately $20 million of co-investments in connection with our real estate
investment management business. We anticipate that our existing sources of
liquidity, including cash flow from operations, will be sufficient to fund
these capital expenditures and co-investments.
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Restrictions in Documents Governing our Long-Term Indebtedness. The terms of
the documents governing our long-term indebtedness that will be outstanding
after the merger will impose significant restrictions on the operation of our
business, including our financing activities. The new credit agreement will
contain numerous restrictive covenants that, among other things, limit our
ability to incur or repay other indebtedness, make advances or loans to our
subsidiaries and other entities, make capital expenditures, incur liens
securing indebtedness of CBRE Holding, enter into mergers or effect other
fundamental corporate transactions, sell our assets or declare dividends. In
addition, we will be required to meet financial ratios relating to our adjusted
net worth, level of indebtedness, fixed charges and interest coverage. The
indentures for our senior notes and the senior subordinated notes due 2011 will
also include limitations on our ability to incur or repay indebtedness, make
advances or loans to our subsidiaries and other entities, incur liens securing
indebtedness of CBRE Holding, enter into mergers or effect other fundamental
corporate transactions, sell our assets or declare dividends. In addition, if
we were to engage in a change of control transaction, as defined in the
indentures governing the senior notes, the 8 7/8% senior subordinated notes and
the 11 1/4% senior subordinated notes, either we or CB Richard Ellis Services
would be required to make an offer to purchase all of the outstanding 11 1/4%
senior subordinated notes, all of the outstanding 8 7/8% senior subordinated
notes and all of the outstanding senior notes at a price of 101% of their
outstanding principal amounts together with any accrued and unpaid interest.
Seasonal Working Capital Requirements. CB Richard Ellis Services' working
capital borrowing requirements are very seasonal because its cash flow from
operating activities has historically been lower in the first three calendar
quarters than in the fourth calendar quarter. The seasonal variation in
operating cash flow and working capital borrowing requirements results in part
from a focus at year-end on completing sales and lease transactions that is
consistent with the real estate industry and in part from the timing of the
payment of cash bonuses to sales professionals and managers. While compensation
expenses are accrued throughout the year, a substantial portion of the actual
cash payments are made in the first quarter of the following fiscal year. As a
result, working capital borrowing requirements are highest in the first two
quarters of the fiscal year and have historically decreased beginning in the
third quarter. In addition, our new $100 million revolving credit facility
requires that we have no outstanding borrowings under the facility during a
period of 45 days commencing on any day chosen by us in the month of December
each year. After giving effect to the merger and the related financings on a
pro forma basis as of December 31, 2000, we would have had $76.2 million of
cash and no borrowings under the revolving credit facility. After giving effect
to the merger transactions on a pro forma basis as of March 31, 2001, we would
have had $1.5 million of cash and $35.0 million of borrowings under the
revolving credit facility.
For the reasons described in the immediately prior paragraph, our working
capital borrowings would be significantly higher and our available cash would
be lower if pro forma effect to the merger and the related financings was made
as of a date during our first or second quarters.
Deferred Compensation Plan Obligations. After the closing of the merger, we
will have obligations under the CB Richard Ellis Services deferred compensation
plan that will require future cash expenditures. Under the CB Richard Ellis
Services deferred compensation plan, each participant may defer a portion of
his or her compensation for distribution generally either after his or her
employment with us ends or on a future date at least three years after the
deferral election date.
The investment alternatives available to participants under the plan after
the merger include, among others, two interest index fund alternatives and an
insurance fund alternative. Under the first interest index fund alternative,
all such allocations are credited with interest at the rate payable by us under
CB Richard Ellis Services' principal credit agreement. Our unfunded obligations
with respect to the first interest index fund totaled $18.3 million as of March
31, 2001 and new deferrals are no longer permitted into that fund. Under the
second interest index fund alternative, which will begin accepting new
deferrals prior to the merger, all deferrals are credited with interest at 10%
per year for five years, or until distributed if earlier, and thereafter at a
rate no lower than the rate CB Richard Ellis Services pays under its principal
credit agreement. Under the insurance fund alternative, the participant can
elect to have gain or loss on deferrals measured by one or more of
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approximately 30 mutual funds. Historically, CB Richard Ellis Services has
elected to transfer to a rabbi trust the full amount of deferrals into the
insurance fund alternative and then hedged its obligations to the participants
under the insurance fund alternative by actually buying a contract of insurance
within which it has premiums invested in the mutual funds which participants
have elected to measure the value of their deferred compensation.
We expect to fund the after-tax cost of these future distributions under the
two interest index alternatives with internally generated cash flow and
borrowings under our new revolving credit facility. With respect to existing
deferrals under the insurance fund alternative, we expect future distributions
to be satisfied by the contracts of insurance that we have purchased. However,
in the future, to the extent we do not fully fund our obligations under the
insurance fund alternative with an insurance contract and transfers into the
rabbi trust, we would need to fund future distributions with internally
generated cash flow and borrowings under our new revolving credit facility.
Because a substantial majority of the deferrals under the deferred
compensation plan have a distribution date based upon the end of the relevant
participant's employment with us, we have an on-going obligation to make
distributions to these participants as they leave our employment. Because the
level of employee departures is not predictable, the timing of these
obligations is also not predictable. Accordingly, we may face significant
unexpected cash funding obligations in the future under our deferred
compensation plan if a larger number of our employees leave our employment than
we expect.
401(k) Plan Obligations. After the closing of the merger, we may be required
to make future cash expenditures as a result of legal requirements applicable
to the CB Richard Ellis Services 401(k) plan. Under the 401(k) plan, generally
upon a participant's termination of employment with us, including as a result
of retirement, the participant may elect to receive the cash value of his or
her investments in the plan. Accordingly, if a participant owns shares of our
common stock that are held in the plan and becomes entitled to receive a
distribution under the plan, the participant may require the plan trustee to
sell those shares and distribute the cash proceeds. However, there will not be
a market for our common stock after the merger, so we will be obligated under
applicable law to purchase the shares at fair market value so the required cash
distribution may occur.
Repayment of Long-Term Indebtedness. The $65 million principal amount of 16%
senior notes that we will issue in connection with the merger will become due
and payable in 2011. The $229.0 million principal amount of the 11 1/4% senior
subordinated notes offering will become due and payable in 2011. Any remaining
outstanding principal amount of CB Richard Ellis Services' existing 8 7/8%
senior subordinated notes after the tender offer for those notes will become
due and payable in 2006. Any amounts outstanding under the revolving credit
facility under the new credit agreement will be due and payable on the sixth
anniversary of the merger. Under the terms of the revolving credit facility, no
amounts can be outstanding as of December 31 of each year. Assuming that none
of CB Richard Ellis Services' existing 8 7/8% senior subordinated notes remain
outstanding after the merger and assuming a closing date during the third
quarter of 2001, the principal amount of the up to $225.0 million of term loans
under the new credit agreement will become due and payable under the following
schedule:
Year Amount Due
---- --------------
2001.......................................................... $ 4.6 million
2002.......................................................... 9.3 million
2003.......................................................... 9.9 million
2004.......................................................... 10.5 million
2005.......................................................... 10.5 million
2006.......................................................... 10.5 million
2007.......................................................... 6.1 million
2008.......................................................... 163.6 million
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Recent Acquisitions
During 2000, CB Richard Ellis Services acquired five companies with an
aggregate purchase price of $3.4 million in cash, $0.7 million in notes, plus
additional payments over the next five years based on acquisition earnout
agreements. These payments will supplement the purchase price and be recorded
as additional goodwill. The most significant acquisition in 2000 was the
purchase of Boston Mortgage Capital Corporation through L.J. Melody for $2.1
million plus supplemental payments based on an acquisition earnout agreement.
Boston Mortgage provides further mortgage banking penetration into the
northeast. It services approximately $1.8 billion in loans covering roughly 175
commercial properties throughout New England, New York and New Jersey.
During 1999, CB Richard Ellis Services acquired four companies with an
aggregate purchase price of approximately $13.8 million. The two significant
acquisitions were Eberhardt Company, which was acquired in September 1999
through L.J. Melody for approximately $7.0 million and Profit Nordic which was
acquired in the first quarter of 1999 through CB Richard Ellis Services Profit
Acquisition Corp., formerly Koll Tender III, for approximately $5.5 million.
In 1998, CB Richard Ellis Services made several large acquisitions. In April
1998, CB Richard Ellis Services purchased all of the outstanding shares of REI,
an international commercial real estate services firm operating under the name
Richard Ellis in major commercial real estate markets worldwide, excluding the
United Kingdom. The acquisition was accounted for as a purchase. The purchase
price has largely been allocated to goodwill, which is amortized on a straight
line basis over an estimated useful life of 30 years. The purchase price for
REI was approximately $104.8 million of which approximately $53.3 million was
paid in cash and notes and approximately $51.5 million was paid in shares of CB
Richard Ellis Services' common stock. In addition, CB Richard Ellis Services
assumed approximately $14.4 million of long-term debt and minority interest.
CB Richard Ellis Services incurred a one-time charge of $3.8 million associated
with the integration of REI's operations and systems into its own.
CB Richard Ellis Services also acquired the business of Hillier Parker in
July 1998. This was a commercial property services partnership operating in the
UK. The acquisition was accounted for as a purchase. The purchase price for
Hillier Parker included approximately $63.6 million in cash and $7.1 million in
shares of CB Richard Ellis Services' common stock. In addition, CB Richard
Ellis Services assumed a contingent payout plan for key Hillier Parker
employees with a potential payout over three years of approximately $13.9
million and assumed various annuity obligations of approximately $15.0 million.
The purchase price has largely been allocated to goodwill which is amortized on
a straight line bases over its estimated useful life of 30 years.
In September of 1998, CB Richard Ellis Services purchased the approximately
73.0% interest that it did not already own in CB Commercial Real Estate Group
of Canada, Inc., now CB Richard Ellis Limited. CB Richard Ellis Services
acquired the remaining interest for approximately $14.3 million in cash. The
acquisition was accounted for as a purchase. The purchase price has been
largely allocated to intangibles and goodwill which are amortized on a straight
line basis over their estimated useful lives ranging up to 30 years.
In October 1998, CB Richard Ellis Services purchased the remaining ownership
interests that it did not already own in the Richard Ellis Australia and New
Zealand businesses. The costs for the remaining interest was $20.0 million in
cash. Virtually all of the revenue of these locations is derived from brokerage
and appraisal services. The acquisition was accounted for as a purchase. The
purchase price has largely been allocated to intangibles and goodwill which are
amortized on a straight line basis over their estimated useful lives ranging up
to 30 years.
CB Richard Ellis Services also made various smaller acquisitions throughout
1998.
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Legal Proceedings
CB Richard Ellis Services and BLUM CB Corp. are party to a number of pending
or threatened lawsuits arising out of, or incident to, our ordinary course of
business. Currently, CB Richard Ellis Services is the defendant in several
lawsuits filed by employees. These suits include claims of wrongful
termination, failure to promote or other similar claims resulting from alleged
gender discrimination or age discrimination. Management believes that any
liability imposed on CB Richard Ellis Services that may result from disposition
of these lawsuits or other lawsuits arising out of its ordinary course of
business will not have a material effect on its consolidated financial position
or results of operations.
In connection with the announcement of the merger transactions, CB Richard
Ellis Services and BLUM CB Corp. have been subject to putative class action
lawsuits. Between November 12 and December 6, 2000, five putative class actions
were filed in the Court of Chancery of the State of Delaware in and for New
Castle County by various stockholders against CB Richard Ellis Services, its
directors and the buying group and their affiliates. A similar action was also
filed on November 17, 2000, in the Superior Court of the State of California in
and for the County of Los Angeles. These actions all alleged that BLUM CB
Corp.'s offering price was unfair and inadequate and sought injunctive relief
or rescission of the merger transactions and, in the alternative, money
damages.
The five Delaware actions were subsequently consolidated and a lead counsel
appointed. As of February 23, 2001, the parties to the Delaware litigation
entered into a memorandum of understanding in which they agreed in principle to
a settlement. The memorandum provides, among other things:
. that the defendants admit no liability or wrongdoing whatsoever;
. that the buying group acknowledge that the pendency and prosecution of
the Delaware litigation were positive contributing factors to its
decision to increase the merger consideration;
. for the lead counsel for the plaintiff to have an opportunity to review
the proxy statement before mailing;
. for the certification of a settlement class and the entry of a final
judgment granting a full release of the defendants; and
. for attorneys' fees in an amount not to exceed $380,000.
Conditions to the settlement proposed by the memorandum include:
. negotiation and execution of a mutually acceptable stipulation of
settlement;
. closing of the merger;
. dismissal of the Delaware and California litigation with prejudice; and
. completion by the plaintiffs of reasonable additional discovery as lead
counsel reasonably believes is appropriate.
The parties may not be able to complete a mutually acceptable stipulation of
settlement, and, if so, the litigation will continue, which could have a
materially adverse impact on our ability to complete the merger. In addition,
no agreements have been reached with respect to any settlement of the
California litigation, and if this litigation continues, it could have a
material adverse impact on our ability to complete the merger.
Euro Conversion Disclosure
A majority of the European Union member countries converted to a common
currency, the "Euro," on January 1, 1999. The existing legacy currencies of the
participating countries will continue to be acceptable until January 1, 2002.
We do not expect the introduction of the Euro to have a significant impact on
our market or the manner in which we conduct business and believe the related
impact on our financial results will not be
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material. Approximately 5% of our 2000 business was transacted in the
participating member countries. CB Richard Ellis Services is currently using
both the Euro and legacy currencies to conduct business in these member
countries.
Net Operating Losses
CB Richard Ellis Services had U.S. federal income tax net operating losses,
or NOLs, of approximately $16.3 million at December 31, 2000, corresponding to
$5.7 million of our $60.3 million in net deferred tax assets before valuation
allowances.
CB Richard Ellis Services' ability to utilize NOLs is currently limited by
Section 382 of the Internal Revenue Code because it previously experienced an
ownership change within the meaning of Section 382. As a result of the
limitation, CB Richard Ellis Services will be able to use approximately $26.0
million of its NOL in 2000. The merger will likely cause another ownership
change. Accordingly, for 2001, the $26.0 million limitation will be pro-rated
based upon the number of days in the year before the merger. Any NOLs not
utilized before the merger will be subject to annual limitation after the
merger equal to the lesser of (1) $26.0 million or (2) the limitation resulting
from the subsequent ownership change. In any event, we anticipate that the
remaining $16.3 million of NOLs will be utilized in 2001.
Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS 140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral established by SFAS 125. In
addition, this statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. CB Richard Ellis
Services does not perform these types of transactions. This statement is
effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The adoption of
SFAS 140 did not have a material impact on our results of operations and
financial position.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities-- Deferral of the Effective Date
of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment of FASB Statement No.
133, which are effective for CB Richard Ellis Services beginning January 1,
2001. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The adoption of
these pronouncements did not have a material impact on the consolidated
financial statements at March 31, 2001.
Historically, CB Richard Ellis Services has not engaged in hedging
transactions and it had no derivatives outstanding at March 31, 2001. In the
future, however, CB Richard Ellis Services may engage in transactions to hedge
the interest rates of its indebtedness as well as its foreign currency
exposures. Therefore, these SFAS statements may impact its results of
operations and financial position.
Quantitative and Qualitative Disclosures About Our Market Risk
Our exposure to market risk consists of foreign currency exchange rate
fluctuations related to our international operations and changes in interest
rates on most of our debt obligations.
During the quarter ended March 31, 2001, approximately 23% of CB Richard
Ellis Services' business was transacted in local currencies of foreign
countries. In the past CB Richard Ellis Services has attempted to
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manage, and in the future expects to continue to manage, this exposure
primarily by balancing monetary assets and liabilities and maintaining cash
positions only at levels necessary for operating purposes in those countries.
While our international results of operations as measured in dollars are
subject to foreign exchange rate fluctuations, we do not consider the related
risk to be material to our financial condition or results of operations. In the
past CB Richard Ellis Services has routinely monitored, and in the future we
expect to continue to monitor, the transaction exposure to currency rate
changes and entered into currency forward and option contracts to limit the
exposure, as appropriate. Gains and losses on contracts are deferred until the
transaction being hedged is finalized. As of March 31, 2001, CB Richard Ellis
Services had no outstanding contracts. Neither we nor CB Richard Ellis Services
engage in any speculative activities.
After the merger, assuming the merger closes during the third quarter of
2001, much of our long-term indebtedness will bear variable rates of interest.
Consistent with past practices of CB Richard Ellis Services, after the merger
we will utilize sensitivity analyses to assess the potential effect of our
variable rate debt. Giving pro forma effect to the merger transactions, if
interest rates were to increase by 1% per annum the net impact would be a
decrease of approximately $2.6 million on our annual pre-tax income and cash
flow. Our expected fixed and variable long-term debt as of the closing of the
merger are as follows:
Sterling
LIBOR LIBOR LIBOR
Fixed Plus Plus Minus
Year of Maturity Rate 3.25% 3.75% 1.5% Total
---------------- -------- ------- -------- -------- --------
2001....................... $ 1,161 $38,750 $ 875 $ -- $ 40,786
2002....................... 1,057 7,500 1,750 1,501 11,808
2003....................... 512 8,125 1,750 -- 10,387
2004....................... 128 8,750 1,750 -- 10,628
2005....................... 20 8,750 1,750 -- 10,520
Thereafter................. 297,321 13,125 167,125 -- 477,571
-------- ------- -------- ------ --------
Total.................... $300,199 $85,000 $175,000 $1,501 $561,700
======== ======= ======== ====== ========
Weighted average interest
rate.................... 13.3% 8.6% 9.1% 4.8% 11.2%
======== ======= ======== ====== ========
The table above assumes that all of the approximately $175.0 million
aggregate principal amount of CB Richard Ellis Services' 8 7/8% Senior
Subordinated Notes due 2006 are repurchased prior to the merger. In the event
that some of these notes are not repurchased, the remaining outstanding
principal amount would be due and payable in 2006 and the amount of our
variable interest rate terms loans initially incurred under the new credit
agreement would be decreased by an equivalent amount. Accordingly, in the event
that any of the senior subordinated notes due 2006 remain outstanding after the
merger, a portion of the indebtedness represented in the table above will be
payable earlier than indicated above but will bear interest at a fixed rate
instead of a variable rate. As of June 8, 2001, a majority of the holders of
the 8 7/8% senior subordinated notes had tendered their notes.
Estimated fair values for our liabilities are not presented because they
either are based on variable rates that approximate terms that we could obtain
currently from other sources or they are liabilities to be entered into in
connection with the merger that have recently negotiated rates that we believe
represent the fair value of the related liabilities.
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BUSINESS
As a result of the proposed merger, CB Richard Ellis Services would become
our wholly-owned subsidiary. Our business after the merger will be the same
business as that conducted by CB Richard Ellis Services and its subsidiaries
before the merger, which we describe below.
Overview
CB Richard Ellis Services is the largest global commercial real estate
services firm in terms of revenue offering a full range of services to
commercial real estate occupiers, owners, lenders and investors. Through its
250 offices, it provides, under the CB Richard Ellis brand name and the CB
Hillier Parker brand name in the United Kingdom, services on a local, national
and international basis across approximately 100 markets in 44 countries.
During 2000, CB Richard Ellis Services advised on approximately 25,000 lease
transactions involving aggregate rents, under the terms of leases facilitated,
of approximately $26.0 billion and approximately 7,500 sales transactions with
transaction values totaling approximately $26.0 billion. Also during 2000, CB
Richard Ellis Services managed approximately 516 million square feet of
property, provided investment management services for $10.0 billion of assets,
originated nearly $7.2 billion in loans, serviced $16.7 billion in loans,
engaged in approximately 32,000 valuation/appraisal and advisory assignments
and serviced approximately 1,400 subscribers with proprietary research. In
addition, at March 31, 2001, CB Richard Ellis Services employed approximately
9,700 employees.
History. CB Richard Ellis Services was founded in 1906. It was formerly
known as CB Commercial Real Estate Services Group, Inc., or CB Commercial, a
holding company, organized on March 9, 1989 under the laws of the state of
Delaware to acquire Coldwell Banker Commercial Group, Inc. This acquisition
occurred on April 19, 1989. On November 25, 1996, CB Commercial completed an
initial public offering of 4,347,000 shares of common stock. Prior to this
public offering, CB Commercial was a reporting company as a result of an
offering to employees under the Securities Act. On May 19, 1998, CB Commercial
changed its name to CB Richard Ellis Services, Inc. which is now and we expect
will continue to be a reporting company after the consummation of the merger
transactions.
As part of its growth strategy, CB Commercial has undertaken various
strategic acquisitions. In 1995, CB Commercial purchased Westmark Realty
Advisors, L.L.C., which has been renamed CB Richard Ellis Investors, L.L.C., or
CBRE Investors. CBRE Investors is a management and advisory business with
approximately $10.0 billion of assets under management. In 1996, CB Commercial
acquired L.J. Melody & Company, or L.J. Melody, a nationally-known mortgage
banking firm. Then in 1997, CB Commercial acquired Koll Real Estate Services,
or Koll, a real estate services company primarily providing property management
services, corporate and facilities management services and asset and portfolio
management services. The following year, CB Commercial purchased all of the
outstanding stock of REI Limited, or REI, which owned and operated the
internationally known real estate services firm of Richard Ellis in all the
major commercial real estate locations in the world, other than the United
Kingdom, or UK. REI's principal operations were in the Netherlands, France,
Spain, Brazil, Australia, Hong Kong, including Taiwan, and the People's
Republic of China, and Singapore. In 1998, CB Commercial also acquired the
business of Hillier Parker May and Rowden, now known as CB Hillier Parker
Limited or Hillier Parker, a commercial property services partnership operating
in the UK. That same year, CB Richard Ellis Services purchased the
approximately 73.0% interest that it did not already own in CB Commercial Real
Estate Group of Canada, Inc. In 1998, CB Commercial acquired the remaining
ownership interests in Richard Ellis Australia and New Zealand.
Nature of Operations. CB Richard Ellis Services is a holding company that
conducts its operations primarily through approximately 75 direct and indirect
operating subsidiaries. In the United States, it operates through CB Richard
Ellis, Inc. and L.J. Melody, in the United Kingdom through Hillier Parker and
in Canada through CB Richard Ellis Limited. CBRE Investors and its foreign
affiliates conduct business in the United States, Europe and Asia Pacific.
CB Richard Ellis Services operates through various subsidiaries in
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approximately 44 countries and pursuant to cooperation agreements in several
additional countries. For the quarter ended March 31, 2001 approximately 77% of
its revenues were from the United States and 23% from the rest of the world.
CB Richard Ellis Services' operations are reported through three geographic
divisions:
. The Americas consist of the U.S., Canada, Mexico and operations located
in Central and South America. We also refer to the operations in Mexico,
Central and South America as the Latin America operations.
. EMEA is an acronym for Europe, the Middle East and Africa. This operating
group became part of our company through a series of acquisitions, most
significantly Hillier Parker and REI.
. Asia Pacific consists of operations in Asia, Australia and New Zealand.
These operations were acquired in part through the REI acquisition and in
total through subsequent acquisitions.
See Note 11 of the Notes to Consolidated Financial Statements for financial
data relating to its geographic regions, which is incorporated herein by
reference.
A significant portion of CB Richard Ellis Services' revenue is seasonal.
Historically, this seasonality has caused its revenue, operating income, net
income and cash flow from operating activities to be lower in the first two
calendar quarters and higher in the third and fourth calendar quarters of each
year. The concentration of earnings and cash flow in the fourth quarter is due
to an industry wide focus of completing transactions by year-end, while
incurring constant, non-variable expenses throughout the year. This has
historically resulted in lower profits or a loss in the first quarter, with
profits growing in each subsequent quarter.
Business Segments
In July 1999, CB Richard Ellis Services undertook a reorganization to
streamline its U.S. operations which resulted in a change in its segment
reporting from four to three segments. CB Richard Ellis Services has eight
primary lines of business which are aggregated, reported and managed through
these three segments: transaction management, financial services and management
services. The transaction management segment is the largest generator of
revenue and operating income and includes brokerage services, corporate
services and investment property activities. Total revenues generated by the
transaction management segment relating to the leasing of commercial real
estate were approximately $510.3 million for the year ended December 31, 2000,
$426.1 million for the year ended December 31, 1999 and $352.8 million for the
year ended December 31, 1998. Total revenues generated by the transaction
management segment relating to the sales of commercial real estate were
approximately $378.5 million for the year ended December 31, 2000, $383.2
million for the year ended December 31, 1999 and $330.2 million for the year
ended December 31, 1998. The financial services segment provides commercial
mortgage, valuation, investment management and consulting and research
services. The management services segment provides facility management services
to corporate real estate users and property management and related services to
owners.
Information regarding revenues and operating income or loss, attributable to
each of CB Richard Ellis Services' business segments is included in "Segment
Operations" within the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and within Note 11 of the Notes to
Consolidated Financial Statements which are incorporated herein by reference.
Information concerning the identifiable assets of each of CB Richard Ellis
Services' business segments is set forth in Note 11 of the Notes to
Consolidated Financial Statements which is incorporated herein by reference.
Transaction Management
Under transaction management, CB Richard Ellis Services operates the
following lines of business:
Brokerage Services. The brokerage services line of business
provides sales, leasing and consulting services relating to commercial
real estate. The brokerage services business line is the
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largest business unit in terms of revenue, earnings and cash flow.
This business is built upon relationships that CB Richard Ellis
Services' employees establish with customers and because of this, we
strive to retain top revenue producers through an attractive
compensation program that motivates the sales force to achieve higher
revenue production. Therefore, the most significant cost is commission
expense which can be as high as 70% of the revenue generated by
brokerage services. CB Richard Ellis Services is the largest
competitor in the commercial brokerage business in terms of revenues
and we believe that the CB Richard Ellis brand provides it with a
competitive operating advantage. CB Richard Ellis Services employs
approximately 2,300 individuals in offices located in most of the
largest metropolitan areas in the U.S. and approximately 1,300
individuals in the rest of the world.
Operations. CB Richard Ellis Services maintains a decentralized
approach to transaction management other than investment properties by
bringing significant local knowledge and expertise to each assignment.
Each local office draws upon the broad range of support services
provided by the other business groups around the world, including an
international network of market research, client relationships and
transaction referrals which CB Richard Ellis Services believes
provides it with significant economies of scale over local, national
and international competitors. While day-to-day operations are
decentralized, most accounting and financial functions are
centralized.
Compensation. Under a typical brokerage services agreement,
brokerage services is entitled to receive sale or lease commissions.
Sale commissions, which are calculated as a percentage of sales price,
are generally earned by this business line at the close of escrow.
Internationally, sales commissions are earned upon completion of work
with no existing contingencies. Sale commissions in the U.S. typically
range from approximately 1% to 6% with the rate of commission
declining as the price of the property increases. In the case of large
investment properties of over $20 million, the commission is generally
not more than 2%, declining to 0.5% for properties greater than $75
million. In the UK, commissions of 0.5% for a sale to .75% for a
purchase are typical. Lease commissions in the U.S. and Canada,
typically calculated either as a percentage of the minimum rent
payable during the term of the lease or based upon the square footage
of the leased premises, are generally earned by brokerage services at
the commencement of a lease, which typically occurs on the tenant
move-in date, unless significant future contingencies exist. In cases
where a third-party brokerage firm is not involved, lease commissions
earned by brokerage services for a new lease typically range between
2% and 6% of minimum rent payable under the lease depending upon the
value of the lease. In the United Kingdom, the leasing commission is
typically 10% of the first year's rent. For renewal of an existing
lease, these fees are generally 50% of a new lease commission. In
sales and leases where a third-party broker is involved, brokerage
services must typically share 50% of the commission with the third-
party broker. For 2000, in the United States, Canada and much of
Australia, brokerage sales professionals received a 40% to 60% share
of commissions before costs and expenses. In most other parts of the
world, brokerage professionals receive a salary and a bonus, profit-
share or a small commission, which in the aggregate approximate a 45%
share of commissions earned by this business line.
Investment Properties. The investment properties line of business
provides brokerage services for commercial real estate property marketed
for sale to institutional and private investors.
Operations and Compensation. At March 31, 2001, this line of
business employed approximately 500 individuals in offices located in
the United States and about 240 individuals in the rest of the world.
Compensation for this operation is similar to the brokerage line of
business.
Corporate Services. The corporate services line of business focuses on
building relationships with large corporate clients. The objective is to
establish long-term relationships with clients that could benefit from
utilizing corporate services broad suite of services and/or global
presence. These clients are offered the opportunity to be relieved of the
burden of managing their commercial real estate activities at a lower cost
than they could achieve by managing it themselves. During 2000, the
facilities management line of
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business began operating under the same leadership as corporate services.
See the section below titled "Management Services" for a description.
Operations. At March 31, 2001, this line of business employed
approximately 415 individuals within the United States and over 80
individuals in the rest of the world. Corporate services include
research and consulting, structured finance, project management, lease
administration and transaction management. These services can be
delivered on a bundled or unbundled basis involving other lines of
business in a single market or in multiple markets around the globe. A
typical corporate services agreement includes a stated term of at
least one year and normally contains provisions for extension of the
agreement.
Compensation. A typical corporate services agreement gives CB
Richard Ellis Services the right to execute some or all of the
client's future sales and leasing transactions and to receive other
fees on a negotiated basis. The commission rate with respect to these
transactions frequently reflects a discount for the captive nature and
large volume of the business. This business line is developing
worldwide pricing to maximize integrated service delivery.
All of these business lines provide sales brokerage and leasing and real
estate consulting services. Additionally, these business lines are motivated to
cross-sell products and services from other business segments.
Financial Services
The financial services business segment is focused on providing commercial
mortgage, valuation, investment advisory and research and consulting services.
We believe that these business lines are complementary to the core businesses
in the transaction management segment, offering reliable returns. A description
of the principal lines of business in the financial services segment are as
follows:
Mortgage Banking. The commercial mortgage business line provides
commercial loan origination and loan servicing through CB Richard Ellis
Services' wholly-owned subsidiary, L.J. Melody. The commercial mortgage
business focuses on the origination of commercial mortgages without
incurring principal risk. As part of its activities, L.J. Melody has
established correspondent and conduit arrangements with investment banking
firms, national banks, credit companies, insurance companies, pension funds
and government agencies.
Under these arrangements, L.J. Melody originates mortgages into conduit
programs where it makes limited representations and warranties based upon
representations made by the borrower or another party. In some situations,
L.J. Melody originates mortgages in its name and immediately sells them
into a conduit program, referred to as "table funding," without principal
risk. Mortgages originated for conduits may or may not have servicing
rights. L.J. Melody originates mortgages in its name, without principal
risk. It also services loans for Federal Home Loan Mortgage Corporation,
Freddie Mac and Federal National Mortgage Association, Fannie Mae. L.J.
Melody is also a major mortgage originator for insurance companies and
pension funds having the right, as correspondent, to originate loans in
their names and subsequently services the mortgage loans it originates. At
March 31, 2001, L.J. Melody serviced mortgage loan portfolios of
approximately $17.1 billion.
Operations. At March 31, 2001, L.J. Melody employed approximately
280 people located in 32 offices in the United States. L.J. Melody has
no material mortgage banking operations outside of the United States.
Its mortgage loan originations take place throughout the U.S. with
support from L.J. Melody's headquarters in Houston, Texas. The
mortgage loan servicing is handled primarily from the Houston, Texas
headquarters with support from regional offices in Atlanta, Georgia;
Minneapolis, Minnesota; Seattle, Washington; Boston, Massachusetts and
Los Angeles, California.
Compensation. L.J. Melody typically receives origination fees,
ranging from 0.5% for large insurance company and pension fund
mortgage loans to 1.0% for most conduit and agency
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mortgage loans. In situations where L.J. Melody services the mortgage
loans it originates, L.J. Melody also receives a servicing fee between
.03% and .25%, calculated as a percentage of the outstanding mortgage
loan balance. These servicing agreements generally contain an
evergreen provision which provides that the agreement remains in
effect for an indefinite period, but enables the lender to terminate
the agreement upon 30 days prior written notice, which L.J. Melody
believes to be a customary industry termination provision. During
2000, a majority of the mortgage loan origination revenue was from
agreements which entitled L.J. Melody to both originate and service
mortgage loans. L.J. Melody also originates mortgage loans on behalf
of conduits and insurance companies for whom it does not perform
servicing. Its client relationships have historically been long-term.
L.J. Melody pays its mortgage banking professionals a combination of
salary, commissions and incentive-based bonuses, which typically
average approximately 50% of loan origination fees earned.
Valuation and Appraisal Services. The valuation line of business
provides valuation and appraisal services and market research. These
services include market value appraisals, litigation support, discounted
cash flow analysis and feasibility and fairness opinions.
Operations. The valuation business is one of the largest in its
industry in the United States. Additional valuation services are
provided internationally. At March 31, 2001, this business line had
nearly 180 employees on staff in the U.S. and approximately 320
internationally. During 2000, it developed proprietary technology for
preparing and delivering valuation reports to its clients. We believe
that this technology provides the valuation business line with
competitive advantages over its rivals.
Compensation. The valuation business line earns most of its fees on
a fixed-fee basis. Some consulting revenue is earned on an hourly
basis.
Investment Management. The investment management line of business
provides investment management and advisory services through CB Richard
Ellis Services' wholly-owned affiliate CBRE Investors. It focuses on
pension plans, investment funds, insurance companies and other
organizations seeking to generate returns through investment in real estate
related assets. CBRE Investors is often requested to "co-invest" with its
clients for a percentage of the total fund. These co-investments range from
2-10% of the fund.
Operations. Operationally, each investment strategy is executed by
a dedicated team with the requisite skill sets. At the present time
there are seven dedicated teams. In the U.S. they are Fiduciary
Services, low risk/return strategies, Strategic Partners, L.P., a
value-added fund, Corporate Partners, LLC, corporate real estate
strategies, and Global Innovation Partners, technology driven real
estate and entry level strategies. Internationally they are CB Hillier
Parker Investors (UK), low risk/return strategies, CBRE Investors
Asia, value-added, and CBRE Investors Europe, value-added. Each team's
compensation is driven largely by the investment performance of its
particular strategy/team. This organizational structure is designed to
align the interests of team members with those of its investor
clients/partners, determine accountability and make performance the
priority.
Dedicated teams share resources such as accounting, financial
controls, information technology, investor services and research. In
addition to the research within the CB Richard Ellis platform, which
focuses primarily on market conditions and forecasts, CBRE Investors
has an in-house team of research professionals that focuses on
investment strategy and underwriting. At March 31, 2001 CBRE Investors
and its foreign affiliates have approximately 130 employees located in
the Los Angeles headquarters and in the regional office in Boston and
over 35 employees internationally.
We believe that this business line provides strategic benefits to
all of the lines of business by providing brokerage opportunities for
assets under management and by being a natural fit for the
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full range of services that CB Richard Ellis Services offers,
including mortgage lending, appraisal and property management.
A key validation of this business occurred during the fourth
quarter of 2000 when CBRE Investors were awarded the assignment to
manage the CalPERS $500 million Global Innovation Partners Fund in
which CB Richard Ellis Services will be making a co-investment of
approximately $25 million. Under the program, the fund will make
investments in real estate and real estate-related entities and
capitalize on opportunities created from the convergence of the
technology and real estate industries. We anticipate that we may
benefit from the opportunity in several ways, including fees, return
on our co-investment, return on a carried interest and significant
cross-selling of services in relation to this program.
Compensation. Investment management fees can have up to three
components. In chronological order, they are: (i) acquisition fees,
(ii) annual portfolio management fees and (iii) incentive fees or
profit sharing. Each fund or account will have two or three of these
components. Fees are typically higher for sponsoring funds or joint
ventures than managing separate accounts. Acquisition and annual
portfolio management fees usually range between 0.5 to 1.0% of the
purchase price in the United States and Asia. In the United Kingdom,
annual fees on separate accounts are typically 0.05 to 0.1% of asset
value. Incentive fees usually range between 10 and 20% of profit in
excess of an agreed upon threshold return. With respect to CBRE
Investors' new funds in the United States and all international
investments, CB Richard Ellis Services also derives fees for ancillary
services including purchase and sale brokerage, mortgage origination,
property management and leasing brokerage.
Real Estate Market Research. We provide real estate market research
services worldwide through CB Richard Ellis/Torto Wheaton Research, CB
Richard Ellis/National Real Estate Index and CB Hillier Parker. Our
research services include data collection and interpretation, econometric
forecasting and portfolio risk analysis. Our publications and products
provide real estate data for more than 70 of the largest metropolitan
statistical areas in the United States and are sold on a subscription basis
to many of the largest portfolio managers, insurance companies and pension
funds. The National Real Estate Index also compiles proprietary market
research for 50 major urban areas nationwide, reporting benchmark market
price and rent data for office, light industrial, retail, and apartment
properties, and tracking the property portfolios of approximately 150 of
the largest real estate investment trusts. The research is prepared by
approximately 200 researchers in the United States.
Management Services
The management services segment provides property, facility and construction
management services, through two lines of business:
Property Management Asset Services. The asset services line of business
provides value-added asset and related services for income-producing
properties owned primarily by institutional investors and, at March 31,
2001, managed approximately 190 million square feet of commercial space in
the United States and approximately 180 million square feet in the rest of
the world. Asset services include maintenance, marketing and leasing
services for investor-owned properties, including office, industrial,
retail and multi-family residential properties. Additionally, asset
services provides construction management services, which relate primarily
to tenant improvements. Asset services works closely with its clients to
implement their specific goals and objectives, focusing on the enhancement
of property values through maximization of cash flow. Asset services
markets its services primarily to long-term institutional owners of large
commercial real estate assets. An asset services agreement puts CB Richard
Ellis Services in a position to provide other services for the owner
including refinancing, appraisal and lease and sales brokerage services.
Operations. At March 31, 2001, asset services employed
approximately 1,000 individuals in the United States and approximately
750 individuals internationally, part of whose compensation is
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reimbursed by the client. Most asset services are performed by
management teams located on-site or in the vicinity of the properties
they manage. This provides property owners and tenants with immediate
and easily accessible service, enhancing client awareness of manager
accountability. All personnel are trained and are encouraged to
continue their education through both internally-sponsored and outside
training. We provide each local office with centralized corporate
resources including investments in computer software and hardware.
Asset services personnel generally utilize state-of-the-art computer
systems for accounting, marketing and maintenance management.
Compensation. Under a typical property management agreement, CB
Richard Ellis Services receives a monthly managerial fee and
reimbursement for the cost of wages for on-site employees. Payments
for reimbursed expenses are netted against those expenses and not
included in revenue.
Facilities Management. The facilities management line of business, now
under the same leadership as corporate services, specializes in the
administration, management and maintenance of properties that are occupied
by large corporations and institutions, including corporate headquarters,
regional offices, administrative offices and manufacturing and distribution
facilities, as well as tenant representation, capital asset disposition,
project management, strategic real estate consulting and other ancillary
services for corporate clients. At March 31, 2001, facilities management
had approximately 119 million square feet under management in the United
States and it also manages approximately 14 million square feet
internationally. We expect the facilities management business both inside
and outside of the U.S. to continue growing in 2001.
Operations. At March 31, 2001, the facilities management business
line employed approximately 1,030 individuals in facilities management
services business in the United States and over 140 individuals
internationally, most of whose compensation is reimbursed by the
client. The facilities management operations in the United States are
organized into three geographic regions in the Eastern, Western and
Central areas, with each geographic region comprised of consulting,
corporate services and team management professionals who provide
corporate service clients with a broad array of financial, real
estate, technological and general business skills. Facilities
management teams are also in place internationally. In addition to
providing a full range of corporate services in a contractual
relationship, the facilities management group will respond to client
requests generated by CB Richard Ellis Services' other business lines
for significant, single-assignment acquisition, disposition and
consulting assignments that may lead to long-term relationships.
Compensation. Under a typical facilities management agreement, CB
Richard Ellis Services is entitled to receive management fees and
reimbursement for its costs including costs of wages of on-site
employees, capital expenditures, field office rent, supplies and
utilities that are directly attributable to management of the
facility. Payments for reimbursed expenses are netted against those
expenses and not included in revenue. Under particular facilities
management agreements, CB Richard Ellis Services may also be entitled
to an additional incentive fee which is paid if it meets select
performance criteria, for example, a reduction in the cost of
operating the facility, which is established in advance with the
client.
Our Strategy
Our strategy is to be the world's leading real estate services firm offering
unparalleled breadth and quality of services across the globe. To implement our
strategy, we intend to:
. Increase International Revenues. We aim to continue to grow our
international business by further penetrating the local markets where we
currently operate and by leveraging our global platform to meet the
global needs of our clients. Our focus will be on the large commercial
real estate markets of Europe and Asia Pacific.
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. Capitalize on Increased Corporate Outsourcing to Increase Market
Share. We plan to use our global presence and breadth of services to
gain market share. We believe that major corporations are increasingly
outsourcing their real estate activities and that we are one of the few
companies with the geographic reach and service offering to handle these
large and complex outsourcing opportunities. We believe corporate
outsourcing will contribute significantly to our revenue growth in
future years.
. Promote Further Cross-Selling and Cross-Utilization of our Services
across the Globe. We intend to further cross-sell and cross-utilize our
services through education and incentive programs that encourage
individuals in one business unit to market the services of other
business units to their clients.
. Build Local Market Share. We intend to build upon our strong local
presences to generate more business from our existing customers and to
develop new relationships with growing companies that have increasing
real estate service needs.
. Grow our Investment Management Business. We intend to continue to grow
our assets under management from the $10.0 billion managed by CBRE
Investors as of December 31, 2000, which represents a 49% increase over
the assets under management by CBRE Investors on December 31, 1998. In
funds where we are the general partner, we will typically co-invest 2%-
10% if required to do so by our clients. Historically, we have generated
significant revenues through the provision of services on an arm's-
length basis to funds managed by CBRE Investors and expect to continue
this in the future.
. Expand our Use of Internet-Based Technology. We intend to utilize
Internet-based technology to improve the delivery systems in all of our
businesses to create internal operating efficiencies, especially in
smaller transactions.
Competition
We believe our strong position within the real estate services industry is
based on our global brand recognition, broad service offerings, ability to
scale these offerings and geographic reach. Specifically:
. Global Brand Name. We are the largest commercial real estate services
provider in the world and, together with our predecessors, have been in
existence for 95 years. We are a global firm operating in 44 countries
across six continents through 250 offices. We believe we are one of the
leading commercial real estate services firms in most major U.S. markets
and in many other important real estate markets around the world. CB
Richard Ellis is the brand name under which we operate in all of our
markets, except in the United Kingdom, where we operate under the brand
name CB Hillier Parker.
. Geographic Reach. We possess in-depth knowledge of local and regional
markets and can provide a full range of real estate services in most
major markets across the globe. Our geographical coverage enables us to
better serve our multinational clients and manage funds for
institutional investors on a global basis.
. Full Service Provider. We provide a full range of real estate services
to meet the needs of our clients. These services include commercial real
estate brokerage services, investment properties, corporate services,
mortgage banking, investment management, valuation and appraisal
services, real estate market research, property management/asset
services and facilities management. We believe our combination of
significant local market presence and diversified line of business
platforms differentiates us from our competitors and provides us with a
competitive advantage.
. High End Commercial Brokerage Focus. Our expertise, breadth of services
and strong client relationships enable us to derive a large proportion
of our commercial brokerage revenues from large, high end transactions.
For example, during 1999, we derived more than half of our sales
commissions in the United States and more than one-third of our lease
commissions in the United States from transactions exceeding $5.0
million in deal size.
. Recurring Revenue from Prior Transactions. We believe we are well
positioned to generate recurring revenues through the turnover of leases
and properties for which we have previously acted as
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transaction manager. Our many years of strong local market presence have
allowed us to develop significant repeat client relationships which are
responsible for a large part of our business. We estimate that during 2000
approximately 68% of our landlord listing assignments were with clients
with whom we had done business previously.
. Strong Relationships with Established Customers. We have long-standing
relationships with a number of the major real estate investors,
including Equity Residential Trust, Lend Lease, MetLife and RREEF. Our
broad national and international presence has enabled us to develop
extensive relationships with many leading corporations, including Ford
Motor Company, GE Capital, JP Morgan Chase, Kodak, Lucent Technologies
and Washington Mutual.
. Experienced Senior Management with Significant Equity Stake. We are led
by an experienced management team. Our Chief Executive Officer, Ray
Wirta, has 33 years of experience in the real estate industry with our
company, Bank of America, Koll Management Services and Koll Real Estate
Services. Ray Wirta will beneficially own between 3.7% and 4.1% of our
outstanding common stock after the merger. In addition, our other
employees will have the opportunity to acquire a total of up to 30.9% of
the CBRE Holding common stock and stock fund units in connection with
the merger transactions.
Despite these competitive advantages, we also experience competitive
disadvantages in the commercial real estate industry. These disadvantages
include:
. Higher Leverage. We will incur substantial additional indebtedness in
connection with the merger transactions, and our debt service
obligations could limit our flexibility in planning for, or reacting to,
changes in our business and in the real estate services industry
generally and therefore could place us at a competitive disadvantage
compared to those of our competitors that are less leveraged.
. Brokerage Competition in Smaller Markets. Our competitors in smaller
markets are often able to act more quickly in response to local trends
due to their size and lack of centralized control. In addition, because
these competitors also do not have to support corporate overhead, these
businesses are often able to pay larger percentage commissions to their
real estate brokerage employees, which gives them a competitive
advantage in attracting and retaining employees that we may not be able
to match.
. Support of Numerous Business Segments. Due to the significant number of
business segments in which we conduct business and the geographic
breadth within these segments, we are less able to focus our resources
on any particular segment, which may place us at a competitive
disadvantage to those of our competitors who have less diverse
operations.
L.J. Melody competes in the United States with a large number of mortgage
banking firms and institutional lenders as well as regional and national
investment banking firms and insurance companies in providing its mortgage
banking services. Appraisal and valuation services are provided by other
international, national, local and regional appraisal firms and some
international, national and regional accounting firms. CBRE Investors has
numerous competitors including other fund managers, investment banks and
commercial banks.
Our management services business competes for the right to manage properties
controlled by third parties. The competitor may be the owner of the property,
who is trying to decide the efficiency of outsourcing, or another management
services company. Increasing competition in recent years has resulted in having
to provide additional services at lower rates, thereby eroding margins.
However, management services enjoys synergies with CB Richard Ellis Services'
other lines of business, especially those within the transaction management
segment.
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Employees
At March 31, 2001, CB Richard Ellis Services had approximately 9,700
employees located in 44 countries. We believe that relations with our employees
are good.
The breakdown of our employees by segment is as follows:
Transaction Management 3,200 employees in the United States.
1,630 employees internationally.
Financial Services
Mortgage banking 280 mortgage banking employees.
Investment management 165 employees in the United States and
internationally.
Valuation and appraisals 500 employees.
Global research and consulting 200 employees in the United States.
Management Services
Property management 1,000 employees in the United States and
750 employees internationally.
Facilities management 1,170 employees in the United States and
internationally.
Other
Administrative support and other 805 employees in the United States and
internationally.
Facilities
CB Richard Ellis Services leases the following offices:
Sales Corporate
Location Offices Offices Total
-------- ------- --------- -----
North America...................................... 170 4 174
Latin America...................................... 4 -- 4
Europe, Middle East and Africa..................... 42 1 43
Asia Pacific....................................... 28 1 29
--- --- ---
Total............................................ 244 6 250
=== === ===
The total rental expense of CB Richard Ellis Services under noncancelable
operating leases, less proceeds received from sublease rentals, for the year
ended December 31, 2000, was approximately $54.9 million.
We do not own any offices, which is consistent with our strategy to lease
instead of own. In general, these offices are fully utilized. There is adequate
alternative office space available at acceptable rental rates to meet our
needs, although rental rates in some markets may negatively affect our profits
in those markets.
Legal Proceedings
CB Richard Ellis Services and BLUM CB are party to a number of pending or
threatened lawsuits arising out of, or incident to, our ordinary course of
business. Currently, CB Richard Ellis Services is the defendant in several
lawsuits filed by employees. These suits include claims of wrongful
termination, failure to promote or other similar claims resulting from alleged
gender discrimination or age discrimination. Management believes that any
liability imposed on CB Richard Ellis Services that may result from disposition
of these lawsuits or other lawsuits arising out of its ordinary course of
business will not have a material effect on its consolidated financial position
or results of operations.
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In connection with the announcement of the merger transactions, CB Richard
Ellis Services and BLUM CB have been subject to putative class action lawsuits.
Between November 12 and December 6, 2000, five putative class actions were
filed in the Court of Chancery of the State of Delaware in and for New Castle
County by various stockholders against CB Richard Ellis Services, its directors
and the buying group and their affiliates. A similar action was also filed on
November 17, 2000, in the Superior Court of the State of California in and for
the County of Los Angeles. These actions all alleged that BLUM CB's offering
price was unfair and inadequate and sought injunctive relief or rescission of
the merger transactions and, in the alternative, money damages.
The five Delaware actions were subsequently consolidated and a lead counsel
appointed. As of February 23, 2001, the parties to the Delaware litigation
entered into a memorandum of understanding in which they agreed in principle to
a settlement. The memorandum provides, among other things:
. that the defendants admit no liability or wrongdoing whatsoever;
. that the buying group acknowledge that the pendency and prosecution of
the Delaware litigation were positive contributing factors to its
decision to increase the merger consideration;
. for the lead counsel for the plaintiff to have an opportunity to review
the proxy statement before mailing;
. for the certification of a settlement class and the entry of a final
judgment granting a full release of the defendants; and
. for attorneys' fees in an amount not to exceed $380,000.
Conditions to the settlement proposed by the memorandum include:
. negotiation and execution of a mutually acceptable stipulation of
settlement;
. closing of the merger;
. dismissal of the Delaware and California litigation with prejudice; and
. completion by the plaintiffs of reasonable additional discovery as lead
counsel reasonably believes is appropriate.
The parties may not be able to complete a mutually acceptable stipulation of
settlement, and, if so, the litigation will continue, which could have a
materially adverse impact on CB Richard Ellis Services' ability to complete the
merger. In addition, no agreements have been reached with respect to any
settlement of the California litigation, and if this litigation continues, it
could have a material adverse impact on our ability to complete the merger.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information about the executive officers of
CBRE Holding, Inc. and CB Richard Ellis Services and the directors of CBRE
Holding, in each case immediately after the closing of the merger:
Name Age Position
---- --- --------
Ray Wirta......... 57 Chief Executive Officer of CB Richard Ellis Services
and CBRE Holding, and a Director of CBRE Holding and
CB Richard Ellis Services
Brett White....... 41 Chairman of the Americas of CB Richard Ellis Services
and CBRE Holding, and a Director of CBRE Holding and
CB Richard Ellis Services
James Leonetti.... 42 Chief Financial Officer of CB Richard Ellis Services
and CBRE Holding
Walter Stafford... 60 Senior Executive VP, Secretary and General Counsel of
CB Richard Ellis Services and CBRE Holding and CB
Richard Ellis Services
Richard Blum...... 65 Director of CBRE Holding and CB Richard Ellis Services
Bradford Freeman.. 59 Director of CBRE Holding and CB Richard Ellis Services
Claus Moller...... 38 Director of CBRE Holding and CB Richard Ellis Services
Pursuant to the terms of the securityholders' agreement, RCBA Strategic has
the right to appoint up to four additional directors and Blum Strategic
Partners II has the right to appoint one director to our board of directors. In
addition, immediately after the closing of the merger, one of our real estate
brokerage employees will be appointed to our board of directors.
Ray Wirta has been CB Richard Ellis Services' Chief Executive Officer since
May 1999 and a director of CB Richard Ellis Services since August 1997. He
served as our Chief Operating Officer from May 1998 to May 1999. Mr. Wirta was
Chief Executive Officer and a Director of Koll Real Estate Services from
November 1994 to August 1997. Prior to that, Mr. Wirta held various management
positions with Koll Management Services, Inc. since 1981. Mr. Wirta was a
member of the board of directors and served as Chief Executive Officer from
June 1992 to November 1996 to Koll Real Estate Group, Inc., which filed for
Chapter 11 bankruptcy protection on July 14, 1997 with a reorganization plan
pre-approved by its bondholders. Mr. Wirta holds a B.A. degree from California
State University, Long Beach and an M.B.A. degree in International Management
from Golden Gate University.
Brett White has been CB Richard Ellis Services' Chairman of the Americas
since May of 1999 and was President of Brokerage Services from August 1997 to
May 1999. Previously, he was Executive Vice President of CB Richard Ellis
Services from March 1994 to July 1997, and Managing Officer of the CB Richard
Ellis Services Newport Beach, California office from 1992 to March 1994. Mr.
White attended the University of California, Santa Barbara from 1979-1984.
James Leonetti has been CB Richard Ellis Services' Chief Financial Officer
since September 2000. Mr. Leonetti spent five years as an Assistant Controller
with Far West Financial and eight years with California Federal Bank, most
recently as its Senior Vice President and Controller. In 1997, Mr. Leonetti
became Chief Financial Officer of Long Beach Mortgage Company, where he
remained until mid-2000 after the sale of the company to Washington Mutual. Mr.
Leonetti holds a B.S. degree in business administration from the University of
Southern California.
Walter Stafford has served as CB Richard Ellis Services' Senior Executive
Vice President and General Counsel since July 1995 and Secretary since May
1998. Mr. Stafford was a partner at the law firm Pillsbury Madison & Sutro LLP
from November 1988 to June 1995 and from January 1973 to March 1982. From March
1982 to November 1988, he was Executive Vice President and General Counsel at
Diasonics, Inc., a medical device manufacturer, and from 1982 to 1994, he was a
director of that company. Mr. Stafford holds a B.A. degree from the University
of California, Berkeley and a J.D. degree from Boalt Hall University of
California at Berkeley.
139
Richard Blum has been a director of CB Richard Ellis Services since 1993. He
is the Chairman and President of BLUM Capital Partners, L.P., a merchant
banking firm he founded in 1975. Mr. Blum is a member of the board of directors
of Northwest Airlines Corporation, Glenborough Realty, URS Corporation and
Playtex Products, Inc. Mr. Blum also serves as Vice Chairman of URS
Corporation. Mr. Blum holds a B.A. degree from the University of California,
Berkeley, a graduate degree from the University of Vienna and an M.B.A. from
the University of California, Berkeley.
Claus Moller has been our President and Sole Director since February 2001.
Mr. Moller has been a Managing Partner of BLUM Capital since 1999. Prior to
joining BLUM Capital, Mr. Moller was a Managing Director at AEA Investors, a
New York based private equity investment firm. Prior to joining AEA, Mr. Moller
was an investment banking associate at Morgan Stanley in New York. Mr. Moller
currently serves as a director for Smarte Carte Inc. Mr. Moller has a cand.
oecon. degree from Aarhus University, Denmark and an M.B.A. from Harvard
Business School.
Bradford Freeman has been a director of CB Richard Ellis Services since
August 1997. Mr. Freeman was a Director of Koll Real Estate Services and Koll
Management Services, Inc. from November 1994 to August 1997. Mr. Freeman is a
founding principal of Freeman Spogli & Co. Incorporated, a private investment
company, and its affiliated investment partnerships or companies, founded in
1983. Mr. Freeman is also a member of the board of directors of RDO Equipment
Company, an agricultural and industrial equipment distributor. Mr. Freeman
holds a B.A. from Stanford University and an M.B.A. from Harvard University.
Board Composition
Upon completion of the merger and prior to an underwritten initial public
offering, following which our common stock is listed on a national securities
exchange or the Nasdaq National Market, each holder of our Class B common stock
securityholder will agree to vote all of its shares to elect the following
representatives to our board of directors:
. between three and six directors designated by RCBA Strategic, with the
actual number to be determined by RCBA Strategic in its discretion;
. one director designated by Blum Strategic Partners II;
. one director designated by Freeman Spogli;
. Ray Wirta;
. Brett White; and
. one director who is a real estate brokerage employee of ours, unless a
majority of our board of directors determines that our board of
directors should exclude such a director.
The Class B common stock subject to the securityholders' agreement will
represent a majority of the votes entitled to be case for the election of our
directors and will therefore have the power to elect the designees described
above to our board of directors. In addition, Freeman Spogli will be entitled
to have two non-voting observers and DLJ Investment Funding, Inc. will be
entitled to one non-voting observer at all meetings of our board of directors
as long as Freeman Spogli owns at least 7.5% and DLJ owns 1.0% of our
outstanding common stock. Our board of directors will be elected by our
stockholders annually for one-year terms. For more information concerning the
composition of our board of directors, the terms of these voting arrangements
and board observer rights see "The Merger Transactions--Securityholders'
Agreement--Governance."
Our executive officers are appointed by the board of directors and serve at
the discretion of our board until their successors have been duly elected and
qualified. There are no family relationships among any of our directors or
officers.
140
Board Committees
Pursuant to the terms of the securityholders' agreement, prior to an
underwritten initial public offering each committee of our board of directors
must include at least one director designated by RCBA Strategic and one
director designated by the FS Equity entities. For more information concerning
the composition of our board of directors and its committees, see "The Merger
Transactions--Securityholders' Agreement--Governance." We will establish an
operating committee that will meet or take written action when the board of
directors is not otherwise meeting and will have the level of authority
delegated to it by the board of directors, except that it cannot amend our
bylaws, recommend any action that requires the approval of the stockholders or
take any other action not permitted under Delaware law to be delegated to a
committee. Our operating committee will perform both audit and compensation
committee functions. Accordingly, the operating committee will review our
internal accounting procedures and consult with and review the services
provided by our independent accountants. The operating committee will
determine, approve and report to the full board of directors on all elements of
compensation and benefits for all of our officers and other employees. The
operating committee will administer our stock option and other employee benefit
plans. Any action by our operating committee must be approved by all members of
that committee. Upon closing of the merger, the operating committee will
consist of Messrs. Moller, White and Wirta. In addition, Freeman Spogli will
designate one observer to the operating committee.
Compensation Committee Interlocks and Insider Participation
Our operating committee will perform those functions typically delegated to
a compensation committee. None of our executive officers serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving on our board of directors or compensation,
other than those executive officers and directors serving in these capacities
for CB Richard Ellis Services.
Director Compensation
We will reimburse our non-employee directors for all out-of-pocket expenses
incurred in the performance of their duties as directors. We do not intend to
pay fees to our directors for attendance at meetings or for their services as
members of the board of directors.
141
Executive Compensation
Summary Compensation Table
The following table indicates information concerning compensation of CB
Richard Ellis Services' Chief Executive Officer and the most highly compensated
executive officers other than the Chief Executive Officers whose salary and
bonus exceeded $100,000 for the year ended December 31, 2000. All information
set forth in this table reflects compensation earned by these individuals for
services with CB Richard Ellis Services for the year ended December 31, 2000.
These executives are referred to as the "Named Executive Officers" elsewhere in
this prospectus.
Annual Compensation Long Term Compensation
------------------------------------------------- ----------------------------------------------
Securities
Underlying
Restricted CB Richard
CB Richard Ellis
Name and Principal Other Annual Ellis Stock Stock All Other
Position Year Salary Bonus (/1/) Compensation (/2/)(/3/) Awards (/3/) Options Compensation (/4/)
- ------------------ ---- -------- ----------- ----------------------- ------------ ---------- ------------------
Ray Wirta............... 2000 $500,000 $972,000 $ 20,251 30,000 35,000 --
Chief Executive Officer 1999 412,523 300,000 12,000 -- -- --
1998 384,387 395,920 12,000 -- 80,000 (/5/) --
James Didion............ 2000 506,308 -- 12,000 -- -- --
Chairman of the Board 1999 496,795 -- 131,718 -- -- 860
1998 500,000 657,218 131,718 -- -- --
Brett White............. 2000 375,000 714,601 49,692 20,000 20,000 --
Chairman of the
Americas 1999 331,846 225,000 45,342 -- 52,000 860
1998 281,250 318,908 45,342 25,000 48,000 --
James Leonetti.......... 2000 72,115 82,500 -- -- 25,000 --
Senior Executive Vice
President 1999 -- -- -- -- -- --
and Chief Financial
Officer 1998 -- -- -- -- -- --
Walter Stafford......... 2000 300,000 244,375 58,406 -- 10,000 --
Senior Executive
President, 1999 298,077 120,000 58,406 -- 20,000 860
Secretary and General
Counsel 1998 300,000 257,550 58,001 -- -- --
- --------
(1) Bonus for each year is paid pursuant to the Annual Management Bonus Plan
in the first quarter of the following year. The bonus shown for 2000 was
paid in March of 2001.
(2) With respect to Other Annual Compensation paid in 1998, 1999 and 2000, the
amounts listed for everyone except Mr. Leonetti include a $12,000
automobile allowance. For Messrs. Wirta, Didion, Stafford and White, the
amounts also include interest accrued and forgiven under the promissory
notes delivered by them pursuant to the CB Richard Ellis Services 1996
Equity Incentive Plan (EIP).
(3) Pursuant to the 1996 EIP, Messrs. Didion and Stafford purchased
respectively in 1996, 175,027 and 48,640 shares of CB Richard Ellis
Services common stock for a purchase price of $10 per share, (the
appraised value of the common stock at the time of such purchase), which
were paid by delivery of full recourse promissory notes. Pursuant to the
1996 EIP, Mr. White purchased 25,000 shares of CB Richard Ellis Services
common stock in 1998 for a purchase price of $38.50 and 20,000 shares of
CB Richard Ellis Services common stock in 2000 for a purchase price of
$12.875. Pursuant to the 1996 EIP, Mr. Wirta purchased 30,000 shares of CB
Richard Ellis Services common stock in 2000 at a purchase price of
$12.875. All of these purchases were paid for by the delivery of full
recourse promissory notes. The Didion and Stafford notes bear interest at
a rate of 6.84% per annum, the White notes bear interest at rates of 5.94%
and 7.4%, respectively, and Mr. Wirta's note bears interest at a rate of
7.4%. All such interest for any year is forgiven if the executive's
performance produces a high enough level of bonus (approximately $7,500 in
interest is forgiven for each $10,000 bonus). A first amendment to Mr.
White's 1998 Promissory Note provides that the portion of the then
outstanding principal in excess of the fair market value of the shares
will be forgiven in the event that Mr. White is an employee of CB Richard
Ellis Services or its
142
subsidiaries on November 16, 2002 and the fair market value of a share of CB
Richard Ellis Services common stock is less than $38.50 on November 16,
2002. In the event of any such principal forgiveness, CB Richard Ellis
Services will pay to Mr. White an amount equal to any federal, state or
local income tax liability resulting from such principal forgiveness. The
aggregate number and value of such shares held by the individuals named
above as of December 31, 2000, net to the purchase price of such shares was
as follows: Mr. Didion--175,027 ($809,500); Mr. Stafford--48,640 ($224,965);
Mr. White--45,000 (negative $561,875); and Mr. Wirta--30,000 ($52,500). The
shares vest at the rate of 5 percent per quarter, commencing December 31,
1995 in the case of Messrs. Didion and Stafford, March 31, 1998 and
September 30, 2000 in the case of Mr. White and at September 30, 2000 in the
case of Mr. Wirta. As a result of bonuses paid in 1999, 2000 and in 2001,
all interest on Mr. Stafford's and Mr. White's promissory notes for 1998,
1999 and 2000 was forgiven. As a result of a bonus paid in 1999, all
interest on Mr. Didion's promissory note for 1998 was forgiven. As a result
of the decision of the Compensation Committee in February of 2000, Mr.
Didion's interest for 1999 was also forgiven. Interest on Mr. Didion's
promissory note was not forgiven in 2000. As a result of a bonus paid in
2001, all interest on Mr. Wirta's note for 2000 was forgiven.
(4) Consists of each individual's allocable share of profit sharing
contributions made by us to our Capital Accumulation Plan, a qualified
profit sharing 401(k) plan.
(5) In each of 1997 and 1998, Mr. Wirta received an option to purchase 100,000
shares of common stock (total of 200,000 shares), pursuant to an option
agreement which was amended on December 15, 1998. Pursuant to the
amendment, the options were repriced to $20 and the number of shares
underlying each option was reduced by 20% from 100,000 to 80,000 shares
(total of 160,000 shares).
Option Grants In Last Fiscal Year
The following table provides information concerning grants of options to
purchase shares of CB Richard Ellis Services common stock made during the
fiscal year ended December 31, 2000, to the Named Executive Officers.
In the fiscal year ended December 31, 2000, options to purchase up to an
aggregate of 487,710 shares of CB Richard Ellis Services were granted to
employees, directors and independent contractors. Most of these options were
granted under various CB Richard Ellis Services' stock option plans at exercise
prices equal to the fair market value of its common stock on the date of grant,
as determined in good faith by the board of directors. All options have a term
of ten years. Generally, these options vest 20% per year over 5 years beginning
August 31, 2001. These assumed rates of appreciation comply with the rules of
the Securities and Exchange Commission and do not represent our estimate of
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of the underlying common stock.
Option Grants in 2000
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Percent of Price
Number of Total Exercise Appreciation for
Securities Options Granted Price Option Term
Underlying to Employees in Per Expiration -----------------
Name Options Granted 2000 Share Date 5% 10%
- ---- --------------- --------------- -------- ---------- -------- --------
Raymond Wirta........... 35,000 7.2% $12.875 8/31/10 $283,395 $718,200
James Didion............ -- -- -- -- -- --
Brett White............. 20,000 4.1 12.875 8/31/10 161,940 410,400
James Leonetti.......... 25,000 5.1 12.875 8/31/10 202,425 513,000
Walter Stafford......... 10,000 2.1 12.875 8/31/10 80,970 205,200
CB Richard Ellis Services has agreed to pay James Leonetti $2.375 in cash
for each option he exercises, which has the effect of reducing his exercise
price per share to $10.50.
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Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values
The following table describes for the Named Executive Officers the
exercisable and unexercisable options held by them as of December 31, 2000.
There were no option exercises by Named Executive Officers in the last fiscal
year. The "Value of Unexercised In-the-Money Options at Fiscal Year End" is
based on the deemed value of our common stock as of December 31, 2000, less the
per share exercise price, multiplied by the number of shares issued upon
exercise of the option.
Fiscal Year End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options
December 31, 2000 at December 31, 2000
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Raymond Wirta............... 32,000 163,000 -- $61,250
James Didion................ 200,000 -- -- --
Brett White................. 29,600 90,400 $3,900 50,600
James Leonetti.............. -- 25,000 -- 43,750
Walter Stafford............. 4,000 26,000 1,500 23,500
Cancellation of Options in the Merger
At the effective time of the merger, each holder of an option to purchase
shares of CB Richard Ellis Services common stock outstanding under any of its
stock option or compensation plans or arrangements, whether or not vested, will
have the right to have the option canceled and in exchange CB Richard Ellis
Services will pay to each holder of a canceled option, as soon as practicable
following the effective time, an amount per share that is subject to the
option, equal to the greater of (A) the amount by which $16.00 exceeds the
exercise price of the option, if any, and (B) $1.00, reduced in each case by
applicable tax withholding.
Each holder of an option that does not elect to receive the consideration
described in the previous paragraph will continue to hold his or her options to
acquire CB Richard Ellis Services common stock after the merger. However, after
the merger, CB Richard Ellis Services will be our wholly-owned subsidiary and
its common stock will be delisted from the New York Stock Exchange.
Accordingly, if any holder exercised his or her options after the merger, the
holder would receive common stock of our subsidiary, which common stock would
be difficult, if not impossible, to sell.
Incentive Plans
CB Richard Ellis Services Deferred Compensation Plan
For a description of this plan, you should see the section of this
prospectus titled "Descriptions of the Plans--CB Richard Ellis Services
Deferred Compensation Plan."
CB Richard Ellis Services 401(k) Plan
For a description of this plan, you should see the section of this
prospectus titled "Description of the Plans--CB Richard Ellis Services 401(k)
Plan."
2001 Stock Incentive Plan
For a description of this plan, you should see the section of this
prospectus titled "Descriptions of the Plans--2001 Stock Incentive Plan."
144
Employment Agreements
Raymond Wirta and Brett White. In connection with the merger transactions,
we expect that Raymond Wirta and Brett White will enter into three-year
employment agreements with us, which agreements are expected to become
effective on the closing of the merger. Following the three-year term, the
employment agreements will be automatically extended for successive twelve
month periods if notice is not received by either party within 120 days prior
to the expiration of the initial term or any renewal term.
Pursuant to the terms of his employment agreement, Raymond Wirta will become
a member of our board of directors and our Chief Executive Officer following
the merger. He will receive an annual base salary of $519,000 and will be
eligible for an annual bonus of up to 200% of his target bonus based upon the
achievement of performance goals established by our board of directors.
Pursuant to the terms of his employment agreement, Brett White will become a
member of our board of directors and our Chairman of the Americas following the
merger. He will receive an annual base salary of $395,000 and will be eligible
for an annual bonus of up to 200% of his target bonus based upon the
achievement of performance goals established by our board of directors.
At the time of the merger, we expect to grant Mr. Wirta 176,153 options and
Mr. White 141,782 options, each having the same terms as the options granted to
other designated managers. Pursuant to each of the employment agreements, all
unvested options held by Messrs. Wirta and White will automatically vest if
there is a change of control of us prior to termination of that executive's
employment with us. The definition of change of control in these agreements
generally includes either of the following:
. the sale or disposition, in one or a series of related transactions, of
all, or substantially all, of the assets of CBRE Holding to any "person"
or "group," as defined in Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, other than RCBA Strategic, Freeman Spogli or their
affiliates or any group which includes any of them; or
. any person or group, other than RCBA Strategic, Freeman Spogli or their
affiliates, is or becomes the beneficial owner, directly or indirectly,
of more than 50% of the total voting power of the voting stock of CBRE
Holding, including by way of merger, consolidation or otherwise and the
representatives of RCBA Strategic, Freeman Spogli or their affiliates,
individually or in the aggregate, cease to have the ability to elect a
majority of the board of directors of CBRE Holding. For our purposes, a
member of a group will not be considered to beneficially own the
securities owned by other members of the group; for our purposes, a
member of the group will not be considered to beneficially own the
securities owned by other members of the group.
We expect that each employment agreement will provide that the executive's
employment by us may be terminated by either party at any time. If during the
term of the agreement we terminate the executive's employment without cause or
the executive terminates his employment for good reason, then the executive
will be entitled to the following severance payments and benefits:
. any accrued but unpaid compensation;
. continued payment of base salary and average annual bonus based on the
previous two fiscal years for a period of two years following the
termination of employment; and
. continued coverage under our medical plans on the same basis as our
active executives until the earlier of the second anniversary of the
termination of employment and the date the executive becomes eligible for
comparable coverage under any future employer's medical plan.
If during the term of the agreement the executive's employment is terminated
due to his death or disability, the executive will be entitled to the following
severance payments:
. any accrued but unpaid compensation; and
. a pro rata portion of any annual bonus that the executive would have been
entitled to receive in the year of termination, payable at the time the
bonus would otherwise have been paid.
145
We expect that each employment agreement will also contain a customary
provision regarding confidentiality, a non-solicitation provision applicable
for a period of two years following the executive's termination of employment
for any reason and a noncompetition provision applicable for a period of two
years following the executive's termination of employment by us without cause
or by the executive with good reason.
James Didion. In 1999, CB Richard Ellis Services and James Didion entered
into an amended and restated ten-year employment agreement which provides for
an annual salary of $500,000 with no incentive compensation or bonus
anticipated. The agreement provides that he will act as a senior advisor to CB
Richard Ellis Services during the term of his employment. For as long as he is
employed, CB Richard Ellis Services will provide medical and other benefits
generally made available to senior officers and an office, a secretary and
clerical help. The amended agreement is terminable by CB Richard Ellis Services
for cause. Cause includes conviction of a felony, fraud and willful and
substantial failure to render services. If the agreement is terminated without
cause or in the event of his death or total disability, he, or his estate, will
continue to be entitled to the salary. In addition, following the merger Mr.
Didion will no longer serve as Chairman of CB Richard Ellis Services.
Limitation of Liability and Indemnification
Our restated certificate of incorporation includes a provision that
eliminates the personal liability of our directors for monetary damages for
breach of fiduciary duty as a director, except to the extent such limitation is
not permitted under the Delaware General Corporation Law.
Our restated certificate of incorporation and bylaws further provide for the
indemnification of our directors and officers to the fullest extent permitted
by Section 145 of the Delaware General Corporation Law, including circumstances
in which indemnification is otherwise discretionary. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted our
directors, officers and controlling persons under the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission this indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. We
also maintain directors' and officers' liability insurance.
146
RELATED PARTY TRANSACTIONS
Since January 1, 1998, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we and our
subsidiaries both prior to and as of the merger, including CB Richard Ellis
Services, were, was or is, or will be a party in which the amount involved
exceeds $60,000 and in which any director, executive officer or holder of more
than 5% of common stock or an immediate family member of any of the foregoing,
had or will have a direct or indirect interest other than compensation
arrangements, which are described under the section of the prospectus titled
"Management," and the transactions described below.
Participation of Our Directors, Officers and Principal Stockholders in the
Merger Transactions
On February 23, 2001, we entered into an agreement and plan of merger with
BLUM CB Corp., which is our wholly-owned subsidiary, and CB Richard Ellis
Services pursuant to which, subject to stockholder approval and to other
conditions set forth in the merger agreement, CB Richard Ellis Services will
become our direct, wholly-owned subsidiary. The merger agreement was amended
and restated on May 31, 2001. For additional information regarding the merger
and the terms and conditions of the merger agreement, you should read the
section of this prospectus titled "The Merger Transactions--Merger Agreement."
Contribution and Voting Agreement
On February 23, 2001, we entered into a contribution and voting agreement
with BLUM CB Corp. and the following other parties, each of which currently
holds shares of CB Richard Ellis Services common stock and which we refer to
together with Blum Strategic Partners II as the "buying group":
. RCBA Strategic;
. Freeman Spogli;
. Raymond Wirta, who will be one of our directors and our Chief Executive
Officer after the merger;
. Brett White, who will be one of our directors and our Chairman of the
Americas after the merger;
. The Koll Holding Company; and
. Frederic Malek.
Pursuant to this agreement, which was amended and restated on May 31, 2001,
each of the members of the buying group will contribute to us all of the shares
of CB Richard Ellis Services common stock that he or it directly owns. Each of
these shares contributed to us will be cancelled as a result of the merger, and
we will not receive any consideration for those shares of CB Richard Ellis
Services common stock. We will issue one share of our Class B common stock in
exchange for each share of CB Richard Ellis Services common stock contributed
to us. This will result in the issuance to the buying group of an aggregate of
8,052,087 shares of our Class B common stock in exchange for these
contributions. Also pursuant to the contribution and voting agreement,
immediately prior to the merger, the BLUM Funds have agreed to purchase a
minimum of 2,553,879 shares of our Class B common stock and an additional
number of shares of CBRE Holding Class B common stock equal to (1) 3,236,669
shares minus (2) the number of shares of our Class A common stock and stock
fund units subscribed in the offerings to employees plus (3) the aggregate
amount of full-recourse notes delivered by designated managers in the offerings
divided by $16.00. The number of shares purchased by the BLUM Funds will be
reduced by 241,885 shares, which is the sum of the 10 shares of CBRE Holding
Class B common stock initially owned by RCBA Strategic and the 241,875 shares
of CBRE Holding Class B common stock purchased by RCBA Strategic for $16.00 per
share in connection with the closing of the sale of 11 1/4% senior subordinated
notes by BLUM CB Corp.
For additional information regarding the terms of the contribution and
voting agreement, you should read the section of this prospectus titled "The
Merger Transactions--Contribution and Voting Agreement."
147
Treatment of CB Richard Ellis Services Equity Interests in the Merger
Options and Warrants. Pursuant to the merger agreement, each person that
holds options to acquire CB Richard Ellis Services common stock will be
entitled to receive in connection with the merger an amount in cash for each
option they own equal to the greater of (A) the amount by which $16.00 exceeds
the exercise price of the option, if any, and (B) $1.00, reduced in each case
by applicable tax withholding.
Each holder of an option that does not elect to receive the consideration
described in the previous paragraph will continue to hold his or her options to
acquire common stock of CB Richard Ellis Services after the merger. However,
after the merger, CB Richard Ellis Services will be a wholly-owned subsidiary
of CBRE Holding and the common stock of CB Richard Ellis Services will be
delisted from the New York Stock Exchange. Accordingly, if any holder exercised
his or her options after the merger, the shares of common stock of CB Richard
Ellis Services that the holder would receive would be difficult, if not
impossible, to sell.
Except as described in the following sentence, as a result of the merger,
each of the warrants to acquire CB Richard Ellis Services common stock that are
outstanding at the time of the merger effectively will terminate. Pursuant to
the contribution and voting agreement, the warrants to acquire shares of CB
Richard Ellis Services common stock that are beneficially owned by both Raymond
Wirta and Donald Koll, who controls The Koll Holding Company, will be converted
into the right to receive $1.00 per share of CB Richard Ellis Services common
stock underlying the warrants.
Based upon the options and warrants held by the members of the buying group
on the date of this prospectus, the members of the buying group, persons
affiliated with members of the buying group and individuals who will become our
directors and executive officers in connection with the merger will be entitled
to receive the following amounts in connection with the merger for options and
warrants, reduced in each case by applicable tax withholding:
. Raymond Wirta will be entitled to receive $269,375 for options to
purchase an aggregate of 195,000 shares, and $55,936 for warrants to
purchase 55,936 shares that are beneficially owned by both Raymond Wirta
and Donald Koll;
. Brett White will be entitled to receive $201,750 for options to purchase
an aggregate of 120,000 shares;
. Richard Blum will be entitled to receive $62,268 for options to purchase
an aggregate of 18,872 shares;
. James Leonetti will be entitled to receive $78,125 for options to
purchase an aggregate of 25,000 shares;
. Walter Stafford will be entitled to receive $1,030,368 for 64,398 shares,
which amount will be reduced to repay the loan from CB Richard Ellis
Services to purchase the shares, and $58,750 for options to purchase an
aggregate of 30,000 shares;
. Donald Koll will be entitled to receive $366,315 for options to purchase
an aggregate of 317,480 shares, and $29,052 for warrants held by him or
The Koll Holding Company to purchase 29,052 shares, which warrants
exclude the warrants beneficially owned by both Donald Koll and Raymond
Wirta described in the first bullet point above; and
. Frederic Malek will be entitled to receive $159,737 for options to
purchase an aggregate of 15,777 shares.
Also pursuant to the contribution and voting agreement, upon the
consummation of the merger, CBRE Holding will issue to Freeman Spogli a warrant
to purchase at an exercise price of $30.00 per share up to an aggregate number
of shares of our Class B common stock equal to the number that represents the
same percentage of the total outstanding shares of our Class B common stock
immediately after the merger as 364,884 shares of CB Richard Ellis Services
common stock, which Freeman Spogli is entitled to acquire under existing
warrants, represent of the total outstanding shares of CB Richard Ellis
Services common stock prior to the consummation of the merger.
148
Securityholders' Agreement
In connection with the closing of the merger, the members of the buying
group, together with DLJ Investment Funding, Inc. and the other purchasers of
our senior notes and the related Class A common stock, will enter into a
securityholders' agreement. This agreement will define various rights of the
parties to the agreement related to their ownership and governance of us,
including voting of their shares of Class B common stock, a right of first
offer for potential sales of some of their shares, co-sale and required sale
rights applicable in connection with transactions involving our shares,
participation rights regarding future issuances of our shares of common stock
and registration rights. For additional information regarding the terms of the
securityholders' agreement, you should read the section of this prospectus
titled "The Merger Transactions--Securityholders' Agreement."
Governance. Each of the members of the buying group will agree to vote each
of the shares of our common stock it or he beneficially owns to elect to our
board of directors individuals designated by various members of the buying
group who will initially include, among others, Richard Blum, Claus Moller,
Bradford Freeman, Ray Wirta and Brett White. A majority of the directors
generally may be designated by RCBA Strategic at any time. Freeman Spogli may
designate one of our directors and Raymond Wirta and Brett White will also be
designated as directors. The securityholders' agreement also provides that we
will be prohibited from taking certain actions without the consent of the
director nominated by Freeman Spogli, including incurring certain indebtedness,
consummating certain acquisitions or dispositions or issuing stock or options
to our employees subject to certain exceptions. For additional information
regarding the members of our board of directors after the merger, you should
read the section of this prospectus titled "Management--Board Composition."
Subject to exceptions, each of the members of the buying group other than
Blum Strategic Partners II will agree to vote the shares of our common stock it
or he beneficially owns on matters to be decided by our stockholders in the
same manner as RCBA Strategic votes the shares of our common stock that it
beneficially owns. As a result, on most matters to be decided by our
stockholders after the merger, RCBA Strategic will be able to control the
outcome.
Registration Rights. Pursuant to the securityholders' agreement, we have
agreed, at the request of the BLUM Funds, Freeman Spogli or DLJ Investment
Funding, Inc., to initiate registrations under the Securities Act of shares
held by that party. In addition, we have also agreed that each member of the
buying group, as well as DLJ Investment Funding, Inc. and the other purchasers
of our senior notes and the related Class A common stock, may "piggyback" on
any registration statements that we file. Except with respect to the BLUM
Funds, these registration rights generally will not apply until after we have
completed, if ever, an underwritten initial public offering of shares of our
common stock after which these shares are listed on a national securities
exchange or on the Nasdaq National Market.
For additional information regarding the terms of the securityholders'
agreement, you should read the section of this prospectus titled "The Merger
Transactions--Securityholders' Agreement."
Replacement of Margin Loan
In connection with the merger and related transactions, we will extend a
loan of $1.5 million to Ray Wirta to replace his existing margin loan with a
third party that is secured by shares of CB Richard Ellis Services common
stock, subject to review of the loan by us. The loan will be full-recourse,
accrue interest at a market rate of interest, compounded annually and payable
quarterly, and have a stated maturity of five years. This loan will be replaced
by a margin loan from a third party when, if ever, our common stock becomes
freely tradable on a national securities exchange or an over-the-counter
market.
In the event, however, that our common stock is not freely tradable as
described above by June 2004, then we will loan Raymond Wirta up to $3.0
million on a full-recourse basis to enable him to exercise an existing option
to acquire shares held by The Koll Holding Company, which is controlled by
Donald Koll, if Ray Wirta
149
is employed by us at the time of exercise or was terminated without cause or
resigned for good reason. The loan will become repayable upon the earliest to
occur of: (1) 90 days following termination of his employment, other than by us
without cause or by him for good reason (2) seven months following the date our
common stock becomes freely tradable as described above and (3) the receipt of
proceeds from the sale of the pledged shares as described below. This loan will
bear interest at the prime rate in effect on the date of the loan, compounded
annually, and will be repayable to the extent of any net proceeds received by
him upon the sale of any shares of our common stock. Ray Wirta will pledge the
shares received upon exercise of the option as security for the loan.
Participation in the Offerings
Identification of Designated Managers. In connection with the offerings,
various terms of the offerings will apply only to the designated managers. The
"designated managers" refers to our 50 employees who on April 1, 2001 were
designated by our board of directors as designated managers and were notified
by us during April 2001 of their designation and who are employed by us as of
the closing of the merger agreement. Each of our executive officers, including
Raymond Wirta, Brett White, James Leonetti and Walter Stafford, is a designated
manager.
Grants of Stock Options. In connection with the offering of shares for
direct ownership, each designated manager will be entitled to receive a grant
of options if he subscribes for at least a percentage of 625,000 shares for
direct ownership allocated to the designated manager by our board of directors.
The number of shares that a designated manager must subscribe for in order to
receive a grant of options will be reduced by the number of deferred
compensation plan stock fund units acquired by the designated manager at the
closing of the offerings by the transfer of account balances currently
allocated to the deferred compensation plan insurance fund. The aggregate
number of options available for grant to the designated managers equals 10% of
the number of fully diluted shares of our Class A common stock and Class B
common stock outstanding at the time of the merger, including all shares
issuable upon exercise of outstanding options and warrants. The options to be
issued to designated managers will have an exercise price of $16.00 per share
and have a term of 10 years. Twenty percent of the options will vest on each of
the first five anniversaries of the merger and all unvested options will vest
if there is a change in control of us. The number of shares that a designated
manager must subscribe for in order to receive a grant of options will be
reduced by the number of deferred compensation plan stock fund units acquired
by the designated manager by the transfer of account balances currently
allocated to the deferred compensation plan insurance fund. The number of
shares that must be purchased by each of our executive officers if he wants to
receive a grant of options are as follows:
. Raymond Wirta--62,500 shares
. Brett White--51,563 shares
. James Leonetti--6,250 shares
. Walter Stafford--18,750 shares
If the executive officer purchases the minimum number of shares that are
required to receive a grant of options, then he will receive a grant of options
equal to the following percentage of the total number of options available for
grant to designated managers:
. Raymond Wirta--10.25%
. Brett White--8.25%
. James Leonetti--1.00%
. Walter Stafford--3.00%
For additional information regarding the grants of options to designated
managers and the terms of the options, you should read the sections of this
prospectus titled "The Offering--Description of the Offerings" and "Description
of Offering Documents--Option Agreement."
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Full-Recourse Note. In connection with the offering of shares for direct
ownership, under specified circumstances, each designated manager may use a
full-recourse note as payment for a portion of the offering price for shares
that he or she purchases. The maximum amount of the full-recourse note that may
be used by a designated manager will be reduced by the amount, if any, of the
manager's deferred compensation plan account balance currently allocated to the
insurance fund that he or she transfers to stock fund units. Unless our board
of directors determines otherwise, the designated manager will be able to use a
full-recourse note if the designated manager subscribes for at least a
percentage of 625,000 shares that is allocated to the designated manager by our
board of directors. The percentage of these shares allocated to each of our
executive officers is indicated in the section above titled "Grants of Stock
Options." Based upon these percentages, the minimum number of shares that each
of our executive officers would need to purchase in the offering of shares for
direct ownership to be able to use a full-recourse note are the following:
. Raymond Wirta--62,500 shares
. Brett White--51,563 shares
. James Leonetti--6,250 shares
. Walter Stafford--18,750 shares
If each executive officer purchases the minimum numbers of shares described
above, then the maximum amount of the full-recourse notes that each of the
executive officers may use as payment for a portion of the shares he purchases
in the offering of shares for direct ownership is the following:
. Raymond Wirta--$500,000
. Brett White--$412,500
. James Leonetti--$50,000
. Walter Stafford--$150,000
In the event that an executive officer delivers a full-recourse note as
payment for a portion of his or her shares purchased for direct ownership, he
or she will have to pledge as security for the note a number of shares having
an offering price equal to 200% of the amount of the note. For additional
information regarding the delivery of full-recourse notes by designated
managers and the terms of the notes and the pledge agreements, you should read
the sections of this prospectus titled "The Offering--Description of the
Offerings," "Description of Offering Documents--Full-Recourse Note" and "--
Pledge Agreement."
Deferred Compensation Plan. Our designated managers will have the right to
transfer into stock fund units an aggregate of up to $2.6 million of deferred
compensation plan account balances that are currently allocated to the
insurance fund under the deferred compensation plan. We are offering up to
162,500 shares of our Class A common stock that are issuable to these holders
of stock fund units upon future distributions under the deferred compensation
plan.
Retention Bonuses
In connection with the merger transactions, we will award cash retention
bonuses to the designated managers employed by us at the time of the merger in
order to provide an incentive and a reward for the designated managers'
continued service up to and including the merger. The aggregate amount of the
retention bonuses will be approximately $1.6 million. The following executive
officers will be among the designated managers receiving cash retention bonuses
in excess of $60,000: Raymond Wirta--$164,000 and Brett White--$132,000.
151
Forgiveness of Loans
Pursuant to CB Richard Ellis Services' Equity Incentive Plan, a restricted
stock purchase plan, shares of CB Richard Ellis Services common stock were
purchased in 1998 and 2000 by some of CB Richard Ellis Services' executive
officers and directors for a purchase price equal to the fair market value,
which was paid by delivery of full-recourse promissory notes. The notes bear
interest at the minimum federal rate, which may be forgiven if the executive's
performance results in the award of a bonus, with approximately $7,500 in
interest forgiven for each $10,000 bonus. The aggregate number, purchase price,
interest rate, value and net value of the shares held by the individuals named
below as of March 31, 2001, were as follows:
Aggregate Aggregate
Number of Purchase Interest Value of
Name Shares Price Rate Shares Net Value
---- --------- --------- -------- --------- ---------
Brett White................ 25,000 $962,500 5.94% $365,625 $(596,875)
Brett White................ 20,000 257,500 7.40 292,500 35,000
Raymond Wirta.............. 30,000 386,250 7.40 438,750 52,500
The shares vest at the rate of 5% per quarter commencing on the purchase
date. As a result of bonuses paid in 2001, all interest on Brett White's and
Raymond Wirta's promissory notes for 2000 were forgiven. In 1998, Brett White
purchased 25,000 shares of common stock at a purchase price of $38.50 per share
and in 2000, he purchased 20,000 shares of common stock for $12.875 per share,
which were each paid for by the delivery of promissory notes. The notes bear
interest at a rate of 5.94% and 7.4% per annum, respectively, which may be
forgiven as previously described. As of December 31, 2000, Brett White held
45,000 shares which, net of the purchase price, had a negative value. The
shares are subject to a right of repurchase by CB Richard Ellis Services, which
right terminates with respect to 5% of the total number of shares each quarter
commencing March 31, 1998, as to the 25,000 shares and September 30, 2000, as
to the 20,000 shares. A First Amendment to the 1998 Promissory Note provides
that the portion of the then outstanding principal in excess of the fair market
value of the shares will be forgiven in the event that Brett White is an
employee of CB Richard Ellis Services or its subsidiaries on November 16, 2002,
and the fair market value of a share of our Class A and Class B common stock is
less than $38.50 on November 16, 2002. In the event of any principal
forgiveness, CB Richard Ellis Services will pay to Brett White an amount equal
to any federal, state or local income tax liability resulting from the
principal forgiveness. In August 2000, CB Richard Ellis Services loaned Brett
White $75,000, which he repaid in March 2001 with interest at 9% per year.
Employment Agreements
In connection with the merger transactions, we will enter into three-year
employment agreements with Raymond Wirta and Brett White, each of which will
become effective upon the closing of the merger. For more information
concerning the terms of these employment agreements, see "Management--
Employment Agreements."
Transaction Fees
Under the terms of the contribution and voting agreement, in connection with
advisory services related to the merger, the general partner of RCBA Strategic
Partners, L.P. will receive from us a transaction fee of $3.0 million and
Freeman Spogli & Co. Incorporated or its designee will receive a transaction
fee of $2.0 million upon closing of the merger. The advisory services provided
include, among other things, transaction and structuring analysis, financing
analysis and the arrangement and negotiation of debt and equity financing. Each
of Richard Blum and Claus Moller, who will be members of our board of directors
after the merger, owns a beneficial interest in the general partner of RCBA
Strategic Partners and would therefore have an interest in the transaction fee
paid to this entity. Bradford Freeman, who will be one of our directors after
the merger, owns a beneficial interest in Freeman Spogli & Co. Incorporated and
would therefore have an interest in the transaction fee paid to Freeman Spogli
& Co. Incorporated or its designee.
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PRINCIPAL STOCKHOLDERS
Prior to the merger transactions, no shares of our Class A common stock will
be issued and outstanding and 241,885 shares of our Class B common stock will
be issued and outstanding, all of which are held directly by RCBA Strategic.
For additional information regarding the persons that control RCBA Strategic,
you should read footnote (2) to the table below.
The table below sets forth information regarding beneficial ownership of the
shares of our Class A common stock and Class B common stock immediately after
the closing of the merger. The table sets forth the number of shares
beneficially owned, and the percentage ownership, for:
. each person that will own beneficially 5% or more of our Class A common
stock or our Class B common stock;
. each of our directors after the merger that has currently been
identified;
. the Named Executive Officers after the merger that have currently been
identified; and
. all of our directors and executive officers as a group after the merger
that has currently been identified.
As described in further detail in the sections of this prospectus titled
"Management," between three and five directors that may be designated by RBCA
Strategic and a director that will be chosen from among our real estate
brokerage employees currently have not been identified and, accordingly, these
unidentified individuals are not included in the table below. Information with
respect to beneficial ownership has been furnished by each director, officer or
5% stockholder, as the case may be. Except as otherwise noted below, the
address for each person listed on the table is c/o CB Richard Ellis Services
Inc., 200 North Sepulveda Boulevard, Suite 300, El Segundo, California 90245.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, which generally attributes beneficial
ownership of securities to persons who possess sole or shared voting power or
investment power with respect to those securities. In computing the number of
shares beneficially owned by a person and the percent of ownership of that
person, shares subject to options or warrants held by that person that are
exercisable as of the date of the merger or will become exercisable within
60 days after the closing of the merger are deemed outstanding, while the
shares are not deemed outstanding for purposes of computing percent ownership
of any other person. Unless otherwise indicated, the persons or entities
identified in this table have sole voting and investment power with respect to
all shares shown as beneficially owned by them, subject to applicable community
property laws.
Percentage ownership prior to these offerings is based on 13,205,614 shares
of common stock outstanding after giving effect to the merger and assumes full
subscription for the offerings. To the extent that any shares are issued upon
exercise of options, warrants or other rights to acquire our capital stock that
are outstanding upon the closing of the merger transactions or granted in the
future or reserved for future issuance under our various stock plans, there
will be further dilution to new investors.
153
Percentage of Shares
Number of Shares Beneficially Owned
Beneficially Owned After the Offerings
----------------------------- --------------------------
Both Both
Class A Class B Classes of Class A Class B Classes of
Common Common Common Common Common Common
Names of Beneficial Owners Stock Stock Stock Stock Stock Stock
- -------------------------- ------- ---------- ---------- ------- ------- ----------
5% Stockholders:
The BLUM Funds
(/1/)(/2/)(/5/)........ -- 5,977,765 5,977,765 -- 56.4% 45.3%
Freeman Spogli
(/1/)(/3/)............. -- 3,402,463 3,402,463 -- 32.1 25.8
Donald Koll (/1/)(/4/).. -- 734,290 734,290 -- 6.9 5.6
Frederic Malek
(/1/)(/5/)............. -- 397,873 397,873 -- 3.8 3.0
DLJ Investment Funding,
Inc. and other
purchasers of our
senior notes (/6/)..... 521,847 -- 521,847 18.9% -- 4.0
Directors and Named
Executive Officers:
Richard Blum
(/2/)(/7/)............. -- 5,977,765 5,977,765 -- 56.4 45.3
Bradford Freeman
(/3/)(/7/)............. -- 3,402,463 3,402,463 -- 32.1 25.8
James Leonetti (/7/).... -- -- -- -- -- --
Claus Moller (/2/)...... -- 5,977,765 5,977,765 -- 56.4 45.3
Walter Stafford (/7/)... -- -- -- -- -- --
Brett White (/1/)(/7/).. -- 58,575 58,575 -- * *
Ray Wirta
(/1/)(/7/)(/8/)........ -- 556,590 556,590 -- 5.2 4.2
All directors and
executive officers as a
group (includes 7
persons) (/7/)......... -- 10,605,966 10,605,966 -- 100% 80.3%
- --------
* Less than 1%
(1) As a result of the securityholders' agreement to which this party or its
affiliate will be a party after the merger, this party, together with the
other members of the buying group will be deemed to constitute a group
within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934. Accordingly, each of the members of this group will be deemed to
beneficially own 10,605,966 shares of our Class B common stock, which will
represent 100% of our Class B common stock and approximately 80.3% of all
outstanding shares of our common stock.
(2) Includes 4,845,900 shares of our Class B common stock held by RCBA
Strategic Partners, L.P. and 1,131,865 shares of our Class B common stock
held by Blum Strategic Partners II, L.P. The sole general partner of RCBA
Strategic Partners is RCBA GP, L.L.C. Richard Blum, Claus Moller and N.
Colin Lind, are managing members of RCBA GP, L.L.C. Each of Messrs. Blum
and Moller will be one of our directors. Except as to any pecuniary
interest, each of Messrs. Blum, Moller and Lind disclaims beneficial
interest of all of these shares. The sole general partner of Blum Strategic
Partners II, L.P. is Blum Strategic GP II, L.L.C. The managing members of
Blum Strategic GP II, L.L.C. include Richard Blum, Claus Moller and N.
Colin Lind. Each of Messrs. Blum and Moller will be one of our directors.
Except as to any pecuniary interest, each of Messrs. Blum, Moller and Lind
disclaims beneficial interest of all of these shares. The business address
of RCBA Strategic Partners, L.P., RCBA GP, L.L.C., Blum Strategic Partners
II, L.P., Blum Strategic GP II, L.L.C., Richard Blum, Claus Moller and N.
Colin Lind is 909 Montgomery Street, Suite 400, San Francisco, California
94133. The BLUM Funds have sole dispositive power over 5,977,765 of the
indicated shares. As a result of the securityholders' agreement, the BLUM
Funds have shared voting power over 5,977,765 of the indicated shares.
(3) Includes 3,278,447 shares of our Class B common stock held by FS Equity
Partners III, L.P. and 124,016 shares of our Class B common stock to be
held by FS Equity Partners International, L.P. As general partner of FS
Capital Partners, L.P., which is general partner of FSEP III, FS Holdings,
Inc. has power to vote and dispose of the shares owned by FSEP III. As
general partner of FS&Co. International, L.P., which is the general partner
of FSEP International, FS International Holdings Limited has the power to
vote and dispose of the shares owned by FSEP International. Bradford
Freeman, Ronald Spogli,
154
Frederick Simmons, William Wardlaw, John Roth and Charles Rullman, Jr. are
the directors, officers and shareholders of FS Holdings and FS
International Holdings, and may be deemed to be the beneficial owners of
the shares of our Class B common stock, and rights to acquire common stock,
owned by FSEP III and FSEP International. The business address of FSEP III,
FS Capital Partners, L.P. and FS Holdings and their directors, officers and
beneficial owners is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles,
California 90025. The business address of FSEP International, FS&Co.
International and FS International Holdings is c/o Paget-Brown & Company,
Ltd., West Winds Building, Third Floor, Grand Cayman, Cayman Islands,
British West Indies. As a result of the securityholders' agreement, FS
Equity Partners III, L.P. and FS Equity Partners International, L.P. have
shared voting power and shared dispositive power over 3,402,463 of the
indicated shares.
(4) Consists of 734,290 shares of Class B common stock owned by The Koll
Holding Company. Mr. Koll is the sole trustee of the Donald M. Koll
Separate Property Trust, which wholly owns The Koll Company, which wholly
owns The Koll Holding Company. Ray Wirta, who will be our Chief Executive
Officer and a director, holds an option granted by The Koll Holding
Company to acquire up to 521,590 of these shares of Class B common stock
owned by The Koll Holding Company.
(5) Includes 98,000 shares owned by a trust for which Mr. Malek is the
trustee. As a result of the securityholders' agreement, Mr. Malek has
shared voting power and shared dispositive power over 397,873 of the
indicated shares.
(6) Includes shares of our Class A common stock to be received by DLJ
Investment Funding, Inc. in connection with its commitment to purchase our
senior notes. In addition, assumes all 339,820 shares of our Class A
common stock sold pursuant to the offering of our 16% senior notes and
related Class A common stock are purchased by DLJ Investment Funding, Inc.
(7) Does not include shares of Class A common stock to be purchased in the
offerings to our employees. The amount of shares of our Class A common
stock to be purchased by its Named Executive Officers and directors in
connection with these offerings will not be determined until after the
date of this offering circular.
(8) Includes 521,590 shares owned by The Koll Holding Company that Mr. Wirta
has the right to acquire under an option granted by The Koll Holding
Company to Mr. Wirta. Mr. Wirta has shared voting power and shared
dispositive power over 556,590 of the indicated shares.
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DESCRIPTION OF CAPITAL STOCK
We are authorized to issue an aggregate of 100,000,000 shares of common
stock, consisting of 75,000,000 shares of Class A common stock, $0.01 par value
per share, and 25,000,000 shares of Class B common stock, $0.01 par value per
share. The following description summarizes information regarding our capital
stock. This information does not purport to be complete and is subject in all
respects to the applicable provisions of the Delaware General Corporation Law,
our restated certificate of incorporation and our bylaws, which are included as
exhibits to the registration statement of which this prospectus forms a part.
Common Stock
As of June 29, 2001, we had 241,885 shares of our Class B common stock
outstanding all of which were held of record by RCBA Strategic.
All outstanding shares of our common stock are fully paid and nonassessable,
and the shares of common stock to be issued upon the closing of the offerings
will be fully paid and nonassessable.
Generally. Upon the closing of the offering, we will have a dual class
common stock structure. The holders of Class A common stock and Class B common
stock will have the same rights. Class B common stock will be issued only to
members of the buying group. All other stockholders, including purchasers in
these offerings, will be issued Class A common stock.
Voting Rights. Each share of Class A common stock entitles the holder to one
vote in all matters submitted to a vote of stockholders. Each share of Class B
common stock entitles the holder to ten votes in all matters submitted to a
vote of stockholders. There is no cumulative voting. Except as required by
applicable law, the holders of Class A common stock and the holders of Class B
common stock will vote together on all matters submitted to a vote of the
stockholders. In the event that any amendment to the certificate of
incorporation is proposed that would alter or change the powers, preferences or
special rights of either class of our common stock so as to affect them
adversely, we must obtain the approval of a majority of the votes entitled to
be cast by the holders of the outstanding shares of the class affected by the
proposed amendment. In addition, the number of authorized shares of Class A
common stock or Class B common stock may be increased or decreased, but not
below the number of shares then outstanding, by the affirmative vote of the
holders of a majority in voting power of our outstanding shares of capital
stock entitled to vote generally in the election of directors.
Dividends. Holders of Class A common stock and Class B common stock are
entitled to receive ratably any dividends that may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event that a dividend or distribution is paid or distributed with
respect to one class of common stock, a simultaneous dividend or distribution
will be paid or distributed on the other class and in the same proportion.
However, in the case of dividends or other distributions payable in common
stock, only shares of Class A common stock will be paid or distributed with
respect to Class A common stock and only shares of Class B common stock will be
paid or distributed with respect to Class B common stock. We may not subdivide
or combine shares of either class of our common stock without at the same time
proportionally subdividing or combining shares of the other class.
Changes in Capitalization. In the event there is an increase or decrease in
the number of issued shares of common stock resulting from any stock split,
stock dividend, reverse stock split, combination or reclassification of our
common stock, or any other similar event resulting in an increase or decrease
in the number of outstanding shares of common stock, the outstanding shares of
Class A common stock and the outstanding shares of Class B common stock will be
adjusted in the same manner.
Conversion. As long as shares of Class B common stock are outstanding, a
holder of Class B common stock may at any time convert any shares of Class A
common stock the holder owns, in whole or in part, on a
156
share for share basis into the same number of shares of Class B common stock. A
holder of Class B common stock may at any time convert any shares of Class B
common stock it owns, in whole or in part, on a share for share basis into the
same number of shares of Class A common stock. In the event of a transfer of
shares of Class B common stock to any person or entity other than a permitted
transferee, each share of Class B common stock so transferred will be converted
automatically into one share of Class A common stock. For the purposes of a
transfer of capital stock, the permitted transferees include the BLUM Funds and
their affiliates, any person or entity that owned Class B common stock at the
effective time of the merger and any single person or entity to which a current
Class B common stock holder transfers its right to be a permitted holder and
all of its Class B common stock. The Class B common stock converts
automatically into Class A common stock on a share for share basis upon the
closing of a qualifying initial public offering.
Mergers and Other Business Combinations. Subject to the next sentence,
unless otherwise approved by a majority of the votes entitled to be cast by the
holders of the outstanding shares of Class A common stock and the outstanding
shares of Class B common stock, each voting separately as a class, all shares
of Class A common stock and Class B common stock will be entitled to receive
equally on a per share basis the same kind and amount of consideration in the
event of any merger, reorganization or consolidation of us with any company. In
the event that one or more of the other corporations or entities that is a
party to a merger or similar transaction with us deems it necessary for the
merger to be treated as a recapitalization for financial accounting purposes
and for us to no longer be subject to the reporting requirements of Section 14
of the Exchange Act after the closing date of the merger, then, solely to the
extent deemed necessary by the other corporation or entity to satisfy these
requirements, the kind of consideration that a holder of a share of Class A
common stock would be entitled to receive may be different than the kind of
consideration that a holder of a share of Class B common stock would be
entitled to receive.
Liquidation. In the event of liquidation, dissolution or winding up, the
holders of Class A common stock and Class B common stock are entitled to share
ratably in all assets remaining after the payment of liabilities.
Other Agreements. In connection with the merger transactions, the buying
group will enter into a securityholders' agreement with us that includes
covenants regarding the voting of their shares and provides for co-sale,
required sale, participation and registration rights. Holders of Class B common
stock have participation rights in future equity issuance pursuant to the terms
of the securityholders' agreement. See "The Merger Transactions--
Securityholders' Agreement."
In addition, shares of our common stock are subject to significant
restrictions on transfer pursuant to the terms of the subscription agreements.
See "Description of the Offering Documents--Subscription Agreements--General
Transfer Restrictions."
Options
Grants of Options to Designated Managers
In connection with the offering of shares for direct ownership to our
designated managers, we will grant options to designated managers to acquire up
to an aggregate of 1,820,397 shares of our Class A common stock. The exercise
price for each of the options granted to designated managers will be $16.00 per
shares.
Vesting Schedule. Subject to the designated manager's continued employment
with us, the options will vest and become exercisable in 20% increments on each
of the first five anniversaries of the grant date. The options will not be
exercisable prior to their vesting. Upon a change of control, all of these
options will become fully vested and exercisable.
Term of Option. Subject to the designated manager's continued employment
with us, the options will have a term of ten years.
Transferability. The options are non-transferable and can only be exercised
by the designated manager or his or her estate.
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Option Agreement. Each designated manager who receives a grant of options to
acquire our Class A common stock will be required to sign and deliver an option
agreement, the terms of which are described in the section of this prospectus
titled "Description of Offering Documents--Option Agreement."
2001 Stock Incentive Plan. All of these options are intended to be non-
qualified stock options and are not intended to be treated as options that
comply with Section 422 of the Internal Revenue Code of 1986, which means that
the designated manager will be subject to taxation at ordinary rates upon
exercise of the stock options. The options will be granted and the shares
underlying the options will be issued under our 2001 Stock Incentive Plan,
which is described in the section of this prospectus titled "Description of the
Plans--2001 Stock Incentive Plan."
Grants of Options to Employees
Options to acquire up to an aggregate of 910,199 shares of our Class A
common stock to our employees will be available to employees in the discretion
of our board of directors. The exercise price for each of the options granted
to employees will be $50.00 per share.
Term of Option. Subject to the employee's continued employment with us, the
options will have a term of five years.
Option Agreement. The terms of the option agreement will be established by
our board of directors prior to a grant of these options.
2001 Stock Incentive Plan. The options will be granted and the shares
underlying the options will be issued under our 2001 Stock Incentive Plan,
which is described in the section of this prospectus titled "Description of the
Plans--2001 Stock Incentive Plan."
Warrants
Upon completion of the merger, we will issue warrants to Freeman Spogli at
an exercise price of $30.00 per share to purchase up to an aggregate of the
number of shares of our Class B common stock equal to the number that
represents the same percentage of the total outstanding shares of our Class B
common stock immediately after consummation of the merger as 364,884 shares of
CB Richard Ellis Services common stock, which Freeman Spogli is entitled to
acquire under existing warrants, represent of the total outstanding shares of
CB Richard Ellis Services common stock prior to the consummation of the merger.
These warrants have both optional and automatic net exercise provisions under
which, instead of payment of the exercise price in cash, Freeman Spogli
surrenders the warrant and receives a net amount of shares based on the fair
market value of our Class B common stock at the time of the exercise of the
warrant, after deducting the aggregate exercise price. The automatic net
exercise is triggered upon a qualifying initial public offering, among other
events. These warrants also have customary anti-dilution provisions.
Registration Rights
Upon completion of the offering, the holders of an aggregate of (a) 521,847
shares of Class A common stock and (b) 10,869,993 shares of Class B common
stock, including 264,027 shares issuable upon exercise of outstanding warrants,
or 14,106,632 shares in the event that no shares are purchased in the
offerings, will be entitled to rights with respect to the registration of these
shares under the Securities Act of 1933. Specifically, we are granting demand
and piggyback registration rights to the BLUM Funds, Freeman Spogli and DLJ
Investment Funding, Inc. and other purchasers of our senior notes in connection
with the merger transactions. Under the terms of the securityholders' agreement
which provides for these registration rights, if we propose to register any of
our securities for resale under the Securities Act, either for our own account
or for the account of other securityholders exercising registration rights, all
holders of registrable securities are entitled to notice of this registration
and are entitled to include shares of common stock in the registration. The
registration rights
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are subject to conditions and limitations, among them the right of the
underwriters of an offering subject to the registration to limit the number of
shares included in the offering. These holders may also require us to file a
registration statement under the Securities Act of 1933 at our expense with
respect to their shares of common stock and we are required to use our best
efforts to effect this registration, subject to conditions and limitations. A
holder's registration rights will terminate if we have completed a qualifying
initial public offering, the holder holds less than 2% of our outstanding
common stock and the holder is entitled to sell all of its shares in any 90 day
period under Rule 144 of the Securities Act. See "The Merger Transactions--
Securityholders' Agreement--Registration Rights" for more information
concerning these rights.
Adjustments
The following is a summary of certain provisions of an anti-dilution
agreement to be entered into by us and the initial purchasers of our senior
notes and the related Class A common stock. This description does not purport
to be complete and is subject to, and qualified in its entirety by reference
to, all of the provisions of the anti-dilution agreement, which is filed as an
exhibit to this Registration Statement.
Pursuant to this anti-dilution agreement, the holders of our Class A common
stock related to the senior notes shall have the right to purchase, at a price
equal to their par value, additional shares of Class A common stock upon the
occurrence of certain events including:
(i) the issuance of our common stock, options, warrants or other
securities convertible into or exchangeable or exercisable for shares of
our common stock or of rights, options or warrants entitling them to
subscribe for shares of our common stock or securities convertible into, or
exchangeable or exercisable for, our common stock, in each case, at a price
which is less than the Current Market Price per share (as defined below) of
our common stock; and
(ii) the issuance of shares of capital stock of our subsidiaries,
including upon the exercise of stock options, other than to us or any of
our wholly-owned restricted subsidiaries.
The right to purchase additional shares of Class A common stock is subject
to important exceptions, including, without limitation, upon:
(a) issuances of common stock pursuant to bona fide public offerings;
and
(b) issuances of common stock pursuant to certain employee stock
purchase programs.
If we consolidate or merge with or into, or transfer or lease all or
substantially all of our assets to, any person, and in connection with such
transaction the holders receive common stock of another entity or option,
warrants or other securities convertible into or exchange for common stock of
another entity, then upon consummation of such transaction, the right to
purchase additional shares will automatically become applicable to the common
stock of such entity.
If any event shall occur as to which the provisions of the anti-dilution
agreement are not strictly applicable but the failure to make any adjustment
would adversely affect the adjustment rights represented by the shares in
accordance with the essential intent and principles of the anti-dilution
agreement, then, in each case, CBRE Holding will appoint an investment banking
firm of recognized national standing, or any other financial expert that does
not (or whose directors, officers, employees, affiliates or stockholders do
not) have a direct or material indirect financial interest in us or any of our
subsidiaries, who has not been, and, at the time it is called upon to give
independent financial advice to us, is not (and none of its directors,
officers, employees, affiliates or stockholders is) a promoter, director or
officer of us or any of our subsidiaries, which shall give its opinion upon the
adjustment, if any, on a basis consistent with the essential intent and
principles established in the anti-dilution agreement necessary to preserve,
without dilution, the rights of holders of the shares.
Current Market Price. Current market price per share of any class of our
common stock at any date shall mean the average of the Quoted Prices of the
common stock for 30 consecutive trading days commencing
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45 trading days before the date in question. The "Quoted Price" of our common
stock is the last reported sales price of our common stock on a securities
exchange if such common stock is then listed on a securities exchange, which
shall be for consolidated trading if applicable to such exchange, the last
reported sales price of the common stock as reported by Nasdaq, or, if neither
so reported or listed, the last reported bid price of the common stock. In the
absence of one or more such quotations, our board of directors will determine
the current market price (i) based on the most recently completed arm's-length
transaction between us and a person other than our affiliate and the closing of
which occurs on such date or shall have occurred within the six months
preceding such date, (ii) if no such transaction shall have occurred on such
date or within such six month period, the value of the security most recently
determined as of a date within the six months preceding such date by Houlihan
Lokey Howard & Zukin Financial Advisors, Inc., or another nationally recognized
investment banking firm or appraisal firm which is not our affiliate (an
"Independent Financial Advisor") or (iii) if neither clause (i) nor (ii) is
applicable, the value of the security determined as of such date by an
Independent Financial Advisor. For purposes of stock options, the current
market price per share of any class of our common stock issuable upon exercise
of such options shall be determined (i) prior to the first bona fide public
offering of our common stock, by the board or directors in good faith and (ii)
after the first bona fide public offering of our common stock, by reference to
the Quoted Price of our common stock on the trading day immediately proceeding
the date of grant or issuance of such option.
No adjustment in the number of shares need be made unless the adjustment
would require and increase or decrease of at least 1% in the number of shares
held by each holder. Any adjustment that is not made will be carried forward
and taken into account in any subsequent adjustment.
Inapplicability of Anti-Takeover Provisions of Delaware Law
We have "opted out" of the protections of Section 203 of the Delaware
General Corporation Law in our restated certificate of incorporation. Section
203 is an anti-takeover law that could otherwise make the acquisition of us,
through a tender offer, a proxy contest or other means, and the removal of
incumbent officers and directors, more difficult.
Transfer Agent
The transfer agent for our Class A common stock is The Bank of New York
located at 101 Barclay Street, 12W, New York, NY 10286 and its telephone number
is (212) 815-2448.
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DESCRIPTION OF INDEBTEDNESS
In connection with the merger, we will issue the 65,000 units described
below and CB Richard Ellis Services will enter into a new senior secured credit
agreement described below. In addition, BLUM CB Corp. has issued 11 1/4% Senior
Subordinated Notes due 2011. Finally, under the circumstances described below,
a portion of the currently outstanding 8 7/8% Senior Subordinated Notes due
2006 may remain outstanding after the merger.
16% Senior Notes Due 2011 and Related Class A Common Stock
In connection with the merger transactions, we will issue 65,000 units,
consisting of $65.0 million in aggregate principal amount of 16% senior notes
due 2011 and 339,820 shares of Class A common stock, to DLJ Investment Funding,
Inc. and certain other purchasers. We will also issue 182,019 shares of our
Class A common stock to DLJ Investment Funding, Inc. in connection with the
commitment it made to purchase our 16% senior notes. The senior notes will be
unsecured obligations, senior to all of our current and future unsecured
indebtedness, but will be effectively subordinated to all current and future
indebtedness of CB Richard Ellis Services. The net proceeds from the units will
be contributed to CB Richard Ellis Services as equity. The senior notes will be
governed by an indenture between us and State Street Bank and Trust Company of
California, N.A., as trustee, and will mature in 2011.
Interest will accrue at a rate of 16% per year and be payable quarterly in
cash in arrears. However, until the fifth anniversary of the issuance of the
senior notes, interest in excess of 12% for the senior notes may be paid in
kind, and at any time, interest may be paid in kind to the extent that CB
Richard Ellis Services' ability to pay us cash dividends is restricted by the
terms of its senior secured credit facilities, which are described below. There
are no mandatory sinking fund payments for the senior notes.
The senior notes will be redeemable at our option, in whole at any time or
in part from time to time, upon not less than 30 nor more than 60 days' notice.
The redemption price, expressed as a percentage of the principal amount, will
be as set forth in the table below, plus accrued and unpaid interest, if
redeemed during the twelve-month period commencing on the anniversary of the
issue date of these notes of the year below:
Year Percentage
---- ----------
2001.......................................................... 116.0%
2002.......................................................... 112.8
2003.......................................................... 109.6
2004.......................................................... 106.4
2005.......................................................... 103.2
2006 and thereafter........................................... 100.0
In the event of a change of control, which will be defined in the indenture,
we will be obligated to make an offer to purchase all outstanding senior notes.
The indenture governing the senior notes will contain customary restrictive
covenants for high yield securities, including, among others, limitations on
the following activities by us and our subsidiaries:
. payments of dividends or distributions to stockholders or the repurchase
of equity or debt that is junior to the senior notes;
. indebtedness and issuance of subsidiary equity;
. consolidation or merger;
. transactions with affiliates;
. liens; and
. disposition of assets.
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The holders of the senior notes will have registration rights with respect
to the senior notes.
This summary of the material provisions of our senior notes is qualified in
its entirety by reference to all of the provisions of the indenture governing
the senior notes, which has been filed as an exhibit to the registration
statement of which this prospectus forms a part. See "Where You Can Find
Additional Information About Us."
CB Richard Ellis Services Senior Secured Credit Facilities
In connection with the merger transactions, CB Richard Ellis Services will
enter into a credit agreement for which Credit Suisse First Boston, or CSFB,
will serve as the administrative and collateral agent, bookrunner and the lead
arranger. In connection with the merger and afterwards to fund our working
capital, we will draw upon the senior credit facilities which will consist of
the following:
. Tranche A term facility of up to $50.0 million;
. Tranche B term facility of up to $175.0 million; and
. a revolving line of credit up to $100.0 million, including revolving
credit loans, letters of credit and a swingline loan subfacility.
The senior secured credit facilities will be jointly and severally
guaranteed by us and certain of our subsidiaries, including future domestic
subsidiaries, and will be secured by substantially all the assets of us and all
our domestic subsidiaries, provided that neither CB Richard Ellis Services nor
any domestic subsidiary will pledge more than 65% of the voting stock of any
foreign subsidiary.
The Tranche A term facility will mature on the sixth anniversary of the
closing date and amortize in equal quarterly installments in the following
annual amounts: $7.5 million in years one and two and $8.75 million thereafter.
The Tranche B term facility will mature on the seventh anniversary of the
closing date of the merger and amortize in equal quarterly installments in an
annual amount equal to 1% of the outstanding principal amount on the closing
date with the balance payable on the maturity date. The revolving line of
credit terminates on the sixth anniversary of the closing date.
Borrowings under the senior secured credit facilities will bear interest at
varying rates based, at our option, on either LIBOR plus 3.25% or the alternate
base rate plus 2.25%, in the case of Tranche A and the revolving facility, and
LIBOR plus 3.75% or the alternate base rate plus 2.75%, in the case of Tranche
B. The alternate base rate is the higher of (1) CSFB's prime rate or (2) the
effective rate for federal funds plus one-half of one percent. After delivery
of our consolidated financial statements for the year ended December 31, 2001,
the amount added to the LIBOR rate or the alternate base rate under the Tranche
A and revolving facility will vary, from 2.50% to 3.25% for LIBOR and from
1.50% to 2.25% for the alternate base rate, as determined by reference to our
ratios of total debt less available cash to EBITDA. The interest rate margins
described above are subject to change until the terms of the credit agreements
are finalized.
We will be required to pay to the lenders under the senior secured credit
facilities a commitment fee on the average unused portion of the revolving
credit facility and a letter of credit fee on each letter of credit
outstanding. We also will be required to apply proceeds of sales of assets,
issuances of equity, incurrences of debt, and excess cash flow or material
assets to the prepayment of the term loans, subject to limited exceptions, as
well as excess cash flow to the lenders under the senior secured credit
facilities.
The credit agreement for the senior secured credit facilities will contain
customary restrictive covenants for a credit agreement, including, among
others, limitations on the following activities by us, CB Richard Ellis
Services and its subsidiaries:
. dividends on, and redemptions and repurchases of, capital stock;
. prepayments, redemptions and repurchases of debt;
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. liens and sale-leaseback transactions;
. loans and investments;
. indebtedness;
. mergers, acquisitions and asset sales;
. transactions with affiliates;
. changes in lines of business; and
. capital expenditures.
In addition, the credit agreement will also contain covenants that require
us to maintain specified financial ratios, including the following ratios:
. total debt less available cash to EBITDA
. total senior debt less available cash to EBITDA
. EBITDA to interest expense plus expense associated with dividends paid to
us to pay amounts due under our 16% senior notes due 2011; and
. adjusted EBITDA to fixed charges.
This summary of the material provisions of the credit agreement is qualified
in its entirety by reference to all of its provisions, which has been filed as
an exhibit to the registration statement of which this prospectus forms a part.
See "Where You Can Find Additional Information About Us."
CB Richard Ellis Services' 8 7/8% Senior Subordinated Notes
CB Richard Ellis Services currently has outstanding senior subordinated
notes due June 1, 2006. The $175.0 million principal amount of these senior
subordinated notes bears annual interest of 8 7/8%. These notes are governed by
an indenture between CB Richard Ellis Services and State Street Bank and Trust
Company of California, National Association. Interest on the 8 7/8% senior
subordinated notes is payable semiannually on each June 1 and December 1. There
are no mandatory sinking fund payments for the notes.
Pursuant to the merger agreement, CB Richard Ellis Services commenced a
tender offer to repurchase all of the outstanding 8 7/8% senior subordinated
notes and a solicitation of consents from the holders of the outstanding 8 7/8%
senior subordinated notes to amend the indenture governing the 8 7/8% senior
subordinated notes to permit the merger transactions contemplated by the merger
agreement. At 5:00 p.m. New York City time on June 8, 2001 the consent
solicitation period for the 8 7/8% senior subordinated notes expired. As of
that time, a majority of the holders of 8 7/8% senior subordinated notes had
consented to the amendments to the indenture and had tendered their notes.
Accordingly, CB Richard Ellis Services intends promptly to execute a
supplemental indenture, which will include amendments that substantially modify
or eliminate the restrictive covenants in the indenture. Also on June 8, 2001
CB Richard Ellis Services extended its offer to purchase the 8 7/8% senior
subordinated notes through 12:00 noon New York City time on July 18, 2001. In
the event that not all of the 8 7/8% senior subordinated notes are tendered,
the notes not tendered will remain outstanding after the consummation of the
merger. In addition, the aggregate amount of term commitments under the credit
agreement will be reduced by the amount of 8 7/8% senior subordinated notes not
tendered. For more information, see "CB Richard Ellis Services Senior Secured
Credit Facilities" described above.
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At any time after June 1, 2002, the 8 7/8% senior subordinated notes will be
redeemable, in whole or in part, at our option. The redemption price, expressed
as a percentage of the principal amount, will be as set forth in the table
below, plus accrued and unpaid interest, if redeemed during the twelve-month
period commencing June 1st of the year below:
Year Percentage
---- ----------
2002.......................................................... 104.4%
2003.......................................................... 102.9
2004.......................................................... 101.4
2005 and thereafter........................................... 100.0
This summary of the material provisions of CB Richard Ellis Services' 8 7/8%
senior subordinated notes is qualified in its entirety by reference to all of
the provisions of the indenture governing these notes, which has been filed as
an exhibit to the registration statement of which this prospectus forms a part.
BLUM CB Corp.'s 11 1/4% Senior Subordinated Notes Due 2011
In connection with the merger, BLUM CB Corp. issued $229.0 million in
aggregate principal amount of 11 1/4% senior subordinated notes due 2011, which
we refer to as the 11 1/4% senior subordinated notes, on June 7, 2001 for net
proceeds of $225.6 million. The 11 1/4% senior subordinated notes are its
unsecured senior subordinated obligations, and will rank equally in right of
payment with any of BLUM CB Corp.'s future senior subordinated unsecured
indebtedness, but will be subordinated to any senior indebtedness of BLUM CB
Corp. The 11 1/4% senior subordinated notes are governed by an indenture
between us, BLUM CB and State Street Bank and Trust Company of California,
N.A., as trustee, and will mature in 2011. If the merger transactions are
consummated on or prior to the 75th day after the issuance of the 11 1/4%
senior subordinated notes, the proceeds from the sale of the 11 1/4% senior
subordinated notes will be released from the escrow account into which they
were deposited on June 7, 2001, and CB Richard Ellis Services will assume the
obligations under these notes.
Interest will accrue at a rate of 11 1/4% per year and be payable
semiannually in arrears on June 15 and December 15, commencing on December 15,
2001. Interest will accrue on the 11 1/4% senior subordinated notes from the
date of original issuance or, if interest has already been paid, from the date
it was most recently paid. Interest will be computed on the basis of a 360 day
year comprised of twelve 30-day months.
There are no mandatory sinking fund payments for the 11 1/4% senior
subordinated notes. We may at any time and from time to time purchase the 11
1/4% senior subordinated notes in the open market or otherwise.
We, and concurrently with the merger, each subsidiary guarantor, have agreed
to guarantee the 11 1/4% senior subordinated notes on a senior subordinated
basis. The guarantees by the guarantors of the notes will be subordinated to
all existing and future senior indebtedness, including guarantees of the senior
credit facilities, of such guarantors. If the merger is not consummated within
75 days of the issuance of the 11 1/4% senior subordinated notes or the merger
agreement is terminated at any time prior thereto, a special mandatory
redemption of the notes will be required and none of CB Richard Ellis Services'
subsidiaries will guarantee the notes.
Except as discussed below, the notes cannot be redeemed prior to June 15,
2006.
Until June 15, 2004, the 11 1/4% senior subordinated notes may be redeemed
on one or more occasions in an amount not to exceed 35% of the principal amount
of all issued 11 1/4% senior subordinated notes at a redemption price of 111
1/4%, plus accrued and unpaid interest to the redemption date, with the cash
proceeds raised in public equity offerings, as long as:
. at least 65% of the aggregate principal amount of the 11 1/4% senior
subordinated notes, including any additional 11 1/4% senior subordinated
notes, remains outstanding after each redemption;
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. if the money is raised in an equity offering by us, then we must
contribute to the issuer an amount sufficient to redeem the 11 1/4%
senior subordinated notes; and
. the 11 1/4% senior subordinated notes are redeemed within 90 days after
the completion of the related equity offering.
On and after June 15, 2006, all or a portion of the 11 1/4% senior
subordinated notes will be redeemable at the issuer's option, upon not less
than 30 nor more than 60 days' notice. The redemption price, expressed as a
percentage of the principal amount on the redemption date, will be as set forth
in the table below, plus accrued and unpaid interest, if redeemed during the
twelve-month period commencing June 15 of the year below:
Year Percentage
---- ----------
2006............................................................ 105.625%
2007............................................................ 103.750
2008............................................................ 101.875
2009 and thereafter............................................. 100.000
In the event of a change of control, as defined in the indenture, the issuer
will be obligated to make an offer to purchase all outstanding 11 1/4% senior
subordinated notes at a redemption price of 101% of the principal amount, plus
accrued interest.
The indenture governing the 11 1/4% senior subordinated notes will contain
customary restrictive covenants for high yield securities, including, among
others, limitations on the following activities by the issuer and its
subsidiaries:
. incurrence of additional indebtedness;
. payments of dividends or distributions to stockholders or the repurchase
of equity or debt that is junior to the 11 1/4% senior subordinated
notes;
. restrictions on distributions from subsidiaries;
. sales of assets and subsidiary stock;
. transactions with affiliates;
. issuance of subsidiary equity; and
. consolidation or merger.
Within 90 days of the merger, BLUM CB Corp. has agreed:
. to file an exchange offer registration statement with the SEC with
respect to a registered offer to exchange the 11 1/4% senior subordinated
notes for new notes of CB Richard Ellis Services;
. to use its reasonable best efforts to cause the exchange offer
registration statement to be declared effective under the Securities Act
within 180 days of the effective date of the merger;
. as soon as practicable after the effectiveness of the exchange offer
registration statement, to offer the new notes in exchange for surrender
of the 11 1/4% senior subordinated notes; and
. to keep the registered exchange offer open for not less than 20 business
days after the date notice of the registered exchange offer is mailed to
the holders of the 11 1/4% senior subordinated notes.
This summary of the material provisions of our 11 1/4% senior subordinated
notes is qualified in its entirety by reference to all of the provisions of the
indenture governing the 11 1/4% senior subordinated notes, which has been filed
as an exhibit to the registration statement of which this prospectus forms a
part.
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SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have an aggregate of 13,205,614 shares of Class
A and Class B common stock outstanding. This includes the 2,077,801 shares of
Class A common stock that we are offering for direct ownership and for
ownership through the CB Richard Ellis Services 401(k) plan. Also after the
offerings, assuming all 1,158,838 stock fund units being offered are subscribed
for, there will be up to 2,003,733 shares of our Class A common stock issuable,
subject to applicable vesting requirements, as a result of elections made under
the CB Richard Ellis Services deferred compensation plan.
Prior to the earlier of the tenth anniversary of the merger and 180 days
after the closing date of an underwritten initial public offering following
which our Class A common stock is listed on a national securities exchange or
the Nasdaq National Market, shares of our Class A common stock will be subject
to significant restrictions on transfer pursuant to the terms of the
subscription agreements. For more information concerning these transfer
restrictions, see "Description of the Offering Documents--Subscription
Agreements--General Transfer Restrictions."
In connection with the offering of direct ownership shares to our designated
managers, we will grant to the designated managers up to an aggregate of
1,820,397 options to acquire shares of our Class A common stock at an exercise
price of $16.00 per share. For more information, see "The Offerings--
Description of the Offerings--Grants of Stock Options to Designated Managers."
Our board of directors will also have discretion to grant to our employees
options to acquire up to an aggregate of 910,199 shares of our Class A common
stock at a purchase price of $50.00 per share. We will also grant options to
acquire our Class A common stock and shares of our Class A common stock under
our 2001 Stock Incentive Plan in the future. Accordingly, we have reserved
1,092,239 shares of our common stock for future issuance under our stock
incentive plan. See "Descriptions of the Plans--2001 Stock Incentive Plan." We
will also issue warrants to Freeman Spogli to purchase up to an aggregate
number of shares of our Class B common stock equal to the number that
represents the same percentage of the total outstanding shares of common stock
immediately after the merger as 364,884 shares of CB Richard Ellis Services
common stock, which Freeman Spogli is entitled to acquire under existing
warrants, represent of the total outstanding shares of CB Richard Ellis
Services common stock. See "Description of Capital Stock--Warrants."
Demand and piggyback registration rights granted to the buying group, DLJ
Funding, Inc. and its affiliates and other purchasers of our senior notes are
described under the caption "The Merger Transactions--Securityholders'
Agreement--Registration Rights" and "Description of Capital Stock--Registration
Rights."
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U.S. FEDERAL TAX CONSEQUENCES
The following describes the material U.S. federal income tax consequences of
the merger and the offerings to individuals who are citizens or residents of
the U.S. who acquire shares of our Class A common stock in the offerings. It
does not address the U.S. federal income tax consequences of the merger or the
offerings to non-U.S. persons. This discussion does not address all aspects of
U.S. federal income taxes and does not deal with foreign, state and local tax
consequences that may be relevant to you in light of your personal
circumstances. Furthermore, the discussion below is based upon the provisions
of the Internal Revenue Code of 1986, as amended, which we refer to as the
Code, and regulations, rulings and judicial decisions promulgated thereunder as
of the date hereof, and these authorities may be repealed, revoked or modified,
possibly retroactively, so as to result in U.S. federal income tax consequences
different from those discussed below. Persons considering participating in the
offerings should consult their own tax advisors concerning the U.S. federal
income tax consequences in light of their particular situations as well as any
tax consequences arising under the laws of any other taxing jurisdiction.
The Merger
This discussion applies to shares of CB Richard Ellis Services common stock
that you own directly, including shares that you may have purchased with a loan
from CB Richard Ellis Services. It does not apply to shares of CB Richard Ellis
Services common stock underlying stock fund units in the CB Richard Ellis
Services deferred compensation plan, shares of CB Richard Ellis Services common
stock held in the CB Richard Ellis Services 401(k) plan, shares acquired
through the CB Richard Ellis Services Special Incentive Plan or options to
acquire shares of CB Richard Ellis Services common stock.
The merger of our subsidiary, BLUM CB Corp., into CB Richard Ellis Services
will be treated for U.S. federal income tax purposes as a redemption of shares
of CB Richard Ellis Services common stock to the extent of the consideration
treated as received from CB Richard Ellis Services in the merger and as an
acquisition of shares of CB Richard Ellis Services common stock by CBRE Holding
to the extent of the consideration treated as received from us in the merger.
The tax consequences to you of the merger may differ depending on the source of
the consideration. We are not able to currently identify the portion of the
consideration in the merger that will be received from CB Richard Ellis
Services, on the one hand, and from CBRE Holding, on the other hand, but we
expect that most of the consideration in the merger will be treated as received
from CBRE Holding.
Assignment of Merger Proceeds
The following discussion assumes that either the shares of our Class A
common stock that you acquire are vested or, if the shares are subject to our
repurchase right, you will make a section 83(b) election with respect to those
shares as required by the designated manager subscription agreement and
described below in "--Shares Acquired in Connection with the Performance of
Services--Acquisition of Shares Subject to Repurchase in the Offering."
To the extent you assign to us your right to receive cash proceeds in the
merger attributable to your shares of CB Richard Ellis Services common stock
(other than shares acquired through the Special Incentive Plan) in payment for
shares of our Class A common stock that you acquire in the offerings, you
should be treated as having exchanged those shares of CB Richard Ellis Services
common stock for our Class A common stock as part of a transaction to which
section 351 of the Code applies, which will include the contributions by and
the issuance of our Class B common stock to the buying group. If section 351 is
applicable:
. you should not recognize gain or loss on the exchange of those shares of
CB Richard Ellis Services common stock for our Class A common stock; and
. your tax basis in our Class A common stock received should be equal to
your tax basis in those shares of CB Richard Ellis Services common stock
you exchanged.
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The IRS might take the position that, notwithstanding your irrevocable
assignment of your right to receive cash proceeds in the merger, you should be
treated as having received the cash proceeds and, then, having reinvested them
in our Class A common stock. In that case, you would be taxed on the cash
proceeds that you would be treated as having received in the manner described
in "--Cash Consideration Treated as received from CB Richard Ellis Services"
and "--Cash Consideration Treated as received from CBRE Holding," even though
you reinvested those proceeds in our Class A common stock.
You may be required by regulations under section 351 of the Code to retain
records related to your CB Richard Ellis common stock and file with your U.S.
federal income tax return a statement setting forth facts relating to the
transactions.
Cash Consideration Treated as Received from CB Richard Ellis Services
To the extent that cash paid in the merger is treated as received in
redemption of your shares of CB Richard Ellis Services common stock, you will
recognize gain or loss equal to the difference between the cash received and
the tax basis in the shares treated as redeemed only if you satisfy the
requirements of section 302 of the Code. If you fail to satisfy the
requirements of section 302, the cash treated as received in redemption of your
shares of CB Richard Ellis Services common stock, without regard to gain or
loss, would be treated as a dividend taxable as ordinary income to the extent
of the current and accumulated earnings and profits of CB Richard Ellis
Services.
A redemption of stock will satisfy the requirements of section 302 if:
. The redemption is "not essentially equivalent to a dividend", meaning
that the redemption results in a meaningful reduction in your
proportionate stock interest in CB Richard Ellis Services after the
merger and the offerings as compared with your interest immediately
before the merger and the offerings, taking into account both actual and
constructive ownership of stock; or
. The redemption is "substantially disproportionate" with respect to you,
meaning that, following the merger and the offerings, you own, actually
and constructively, less than 80% of the amount of CB Richard Ellis
Services stock that you owned, actually and constructively, immediately
before the merger and the offerings; or
. The redemption results in a "complete termination" of your interest in
CB Richard Ellis Services, meaning that all of the stock actually and
constructively owned by you has been redeemed.
Following the merger, CB Richard Ellis Services will become our wholly-owned
subsidiary and, therefore, you will no longer own any stock in CB Richard Ellis
Services. Even if you acquire our stock in the offerings, you should not
constructively own any of the stock of CB Richard Ellis Services that we will
own because, under the relevant constructive ownership rule, you will own less
than 50% of the value of our stock. Therefore, you should be able to satisfy
the "complete termination" test with respect to your shares that are treated as
redeemed by CB Richard Ellis Services in the merger. As a result, any gain or
loss that you recognize on the redemption of those shares should be capital
gain or loss if you hold your CB Richard Ellis Services shares as a capital
asset and should be long-term capital gain or loss if you have held those
shares for more than one year at the effective date of the merger.
Nonetheless, the IRS might take the position that all of the cash
consideration that you receive in the merger should be treated as received from
CBRE Holding for purposes of determining the tax consequences of the merger to
you. In that case, as discussed below, under the applicable constructive
ownership rules, you would be treated as owning a percentage of the stock of CB
Richard Ellis Services that we will own following the merger even though you
will own less than 50% of our stock. As a result, you would not be able to
satisfy the "complete termination" test with respect to your ownership of CB
Richard Ellis Services and would have to satisfy one of the other section 302
tests, after applying the constructive ownership rules of section 318 of the
Code, as modified by section 304, to obtain gain or loss treatment and avoid
dividend treatment on the cash
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you receive in the merger. The application of section 302 of the Code and the
constructive ownership rules of section 318 of the Code are complex and you
should consult your own tax advisor as to their applicability to your
particular circumstances.
Cash Consideration Treated as Received from CBRE Holding
Shareholders who, in the aggregate, own more than 50% of stock of CB Richard
Ellis Services will, following the merger and the offerings, own, in the
aggregate, more than 50% of our stock. Therefore, section 304 of the Code will
apply to the extent that cash paid in the merger is treated as received from
CBRE Holding by a shareholder of CB Richard Ellis Services who participates in
the offerings. As a result, you will recognize gain or loss equal to the
difference between the cash received and the tax basis in your shares of common
stock of CB Richard Ellis treated as acquired by CBRE Holding only if you
satisfy the requirements of section 302 of the Code, described above, with
respect to your ownership of CB Richard Ellis Services. If you fail to satisfy
the requirements of section 302, the cash treated as received from CBRE Holding
for your shares of CB Richard Ellis Services common stock, without regard to
gain or loss, would be treated as a dividend taxable as ordinary income to the
extent of the current and accumulated earnings and profits of CB Richard Ellis
Services and CBRE Holding.
However, unlike the rules applicable to cash treated as received in
redemption of shares of CB Richard Ellis Services common stock, described
above, in determining whether you satisfy the requirements of section 302 for
purposes of section 304, you will be treated as owning a percentage of the
stock of CB Richard Ellis Services that we will own following the merger based
upon your actual and constructive ownership of our stock even though you will
own less than 50% of our stock. Therefore, you will not be able to satisfy the
"complete termination" test, described above. To obtain gain or loss treatment
and avoid dividend treatment, you must satisfy one of the other section 302
tests.
To determine whether either of the other section 302 tests is satisfied, you
must take into account not only the stock that you actually own, but also any
stock you are deemed to own under the constructive ownership rules of section
318 of the Code. Under section 318, as modified by section 304, you are deemed
to own:
. stock owned, directly or indirectly, by or for your spouse, children,
grandchildren and parents;
. stock owned, directly or indirectly, by corporations, partnerships,
estates or certain trusts (not including a trust under section 401(a),
such as the trust under the CB Richard Ellis Services 401(k) plan), in
proportion to your interest in each entity;
. a percentage of shares of CB Richard Ellis Services stock owned by us
equal to the percentage by value of CBRE Holding stock that you own; and
. stock that you may acquire by exercise of currently vested options.
The application of section 304 of the Code and the constructive ownership
rules of section 318 of the Code are complex and you should consult your own
tax advisor as to their applicability to your particular circumstances.
If you satisfy the section 302 requirements with respect to your shares of
CB Richard Ellis Services common stock acquired by CBRE Holding, any gain or
loss that you recognize on those shares should be capital gain or loss if you
hold your CB Richard Ellis Services shares as a capital asset and should be
long-term capital gain or loss if you have held those shares for more than one
year at the effective date of the merger.
Shares Acquired in Connection with the Performance of Services
This discussion applies only to shares of our Class A common stock that you
acquire directly, and not to any shares of Class A common stock that will
underlie stock fund units in the CB Richard Ellis Services deferred
compensation plan or that will be acquired by the CB Richard Ellis Services
401(k) plan.
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Acquisition of Vested Shares in the Offering
Designated managers and non-management employees who acquire fully vested
shares of our Class A common stock in the offerings will be treated as having
acquired those shares in connection with the performance of services. Under
section 83 of the Code, you would have taxable ordinary income equal to the
excess, if any, of the fair market value on the date of acquisition of the
shares you acquire over the amount of cash you paid, or the fair market value
of CB Richard Ellis Services common stock you exchanged, for the shares.
Although the value of a share is speculative, we believe that the consideration
paid for the shares will be equal to their fair market value. In this case, the
acquisition of shares of our Class A common stock would not result in any
taxable income. However, the IRS might assert that the shares of Class A common
stock have a higher value with the result that you would have taxable income
with respect to their acquisition equal to the excess of that higher value over
the consideration paid for the shares.
Acquisition of Shares Subject to Repurchase in the Offering
Shares of our Class A common stock that are subject to our right of
repurchase described in "The Offerings--Right of Repurchase for Designated
Manager Shares" will be 100% unvested upon issuance and will vest 20% on each
anniversary of the closing of the offering. Pursuant to the designated manager
subscription agreement, a designated manager will be required to make a section
83(b) election with respect to his or her shares subject to our repurchase
right. As a result, you will have taxable ordinary income equal to the excess,
if any, of the fair market value of those shares on the date of their
acquisition over the amount paid for the shares. As discussed above, we believe
that the price paid for the shares will be equal to their fair market value
and, accordingly, that the election would result in no taxable income with
respect to the acquisition of shares. However, the IRS might assert that the
shares of Class A common stock have a higher value with the result that you
would have taxable ordinary income with respect to their acquisition equal to
the excess of that higher value over the consideration paid for the shares. In
this case, section 83(b) would prevent you from deducting a loss in that amount
if you forfeit any shares upon termination of employment.
If notwithstanding the designated manager subscription agreement you do not
make a section 83(b) election for shares of our Class A common that are subject
to our right of repurchase, you would be required to include as taxable
ordinary income an amount equal to the excess of the fair market value of the
shares subject to our right of repurchase at the time our right of repurchase
expires with respect to each block of shares over the amount paid for those
shares.
A section 83(b) election must be made within 30 days after the shares are
acquired. Each designated manager is responsible for the timely filing of a
section 83(b) election. The form must be filed with the IRS at the address
where a designated manager files his or her income tax return. The election may
not be revoked without the consent of the IRS. Designated managers should
discuss the filing of a section 83(b) election with their own tax advisors.
Offering of Shares to 401(k) Plan
The disposition of shares of CB Richard Ellis Services common stock in the
merger held by the CB Richard Ellis Services 401(k) Plan and the subsequent
reinvestment of the cash proceeds in other investment options, including
purchase of our Class A common stock, permitted under the amended 401(k) Plan
will not result in any U.S. federal income tax consequences to you.
Offering of Shares Underlying Stock Fund Units in Deferred Compensation Plan
The substitution of shares of CB Richard Ellis Services common stock
underlying stock fund units in the deferred compensation plan with our Class A
common stock will not result in taxable income to a participant in that plan
until the participant has received, actually or constructively, the underlying
stock.
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General U.S. Federal Income Tax Considerations of Holding Shares of Our Class A
Common Stock
The following discussion assumes that either the shares of our Class A
common stock that you acquire are vested or, if the shares are subject to our
repurchase right, you will make a section 83(b) election with respect to those
shares as required by the designated manager subscription agreement and
described above in "--Shares Acquired in Connection with the Performance of
Services--Acquisition of Shares Subject to Repurchase in the Offering."
Distributions on the shares will generally constitute dividends for federal
income tax purposes to the extent paid from our current or accumulated earnings
and profits as determined under federal income tax principles. This income will
be includible in your gross income as ordinary income on the day received by
you. To the extent that the amount of any distribution exceeds our current and
accumulated earnings and profits, the distribution will first be treated for
federal income tax purposes as a tax-free return of capital, causing a
reduction in the adjusted basis of the shares, thereby increasing the amount of
gain, or decreasing the amount of loss, to be recognized by you on a subsequent
disposition of the shares, and the balance in excess of adjusted basis will be
taxed as capital gain recognized on a sale or exchange.
For U.S. federal income tax purposes, you will recognize taxable gain or
loss on any sale or exchange of a share in an amount equal to the difference
between the amount realized for the share and your adjusted basis in the share.
This gain or loss will be capital gain or loss. Capital gains of individuals
derived with respect to capital assets held for more than one year are eligible
for reduced rates of taxation. The deductibility of capital losses is subject
to limitations.
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U.S. FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following summary describes the material U.S. federal income and estate
tax consequences of the ownership of shares of our Class A common stock by a
Non-U.S. Holder, as defined below, who does not and will not perform services
within the U.S. This discussion does not address all aspects of U.S. federal
income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to these Non-U.S. Holders in light of their
personal circumstances. The discussion below is based upon the provisions of
the Code and regulations, rulings and judicial decisions thereunder as of the
date hereof, and these authorities may be repealed, revoked or modified so as
to result in U.S. federal income tax consequences different from those
discussed below. Persons considering participating in the offerings should
consult their own tax advisors concerning the U.S. federal income tax
consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
As used herein, a "Non-U.S. Holder" is an individual who is not a citizen or
resident of the U.S.
The Merger
If cash consideration received in the merger is treated as a dividend to you
it would be subject to U.S. federal income tax at a 30% rate or a lower rate as
may be specified by an applicable income tax treaty. To determine whether any
cash consideration would be treated as a dividend, please see "U.S. Federal Tax
Consequences--The Merger--Cash Consideration Treated as Received from CB
Richard Ellis Services" and "U.S. Federal Tax Consequences--The Merger--Cash
Consideration Treated as Received from CBRE Holding." Because the rules for
determining dividend treatment are complex, you should consult your own tax
advisor as to their applicability to your particular circumstances.
Holding Shares of Our Class A Common Stock
Dividends
Dividends paid to a Non-U.S. Holder of Class A common stock generally will
be subject to withholding of U.S. federal income tax at a 30% rate, or a lower
rate as may be specified by an applicable income tax treaty. However, dividends
that are effectively connected with the conduct of a trade or business by a
Non-U.S. Holder within the U.S. and, where a tax treaty applies, are
attributable to a U.S. permanent establishment of a Non-U.S. Holder, are not
subject to the withholding tax, but instead are subject to U.S. federal income
tax on a net income basis at applicable graduated individual or corporate
rates. Certification and disclosure requirements must be complied with in order
for effectively connected income to be exempt from withholding.
A Non-U.S. Holder of Class A common stock who wishes to claim the benefit of
an applicable treaty rate, and avoid back-up withholding as discussed below,
for dividends paid will be required to satisfy applicable certification and
other requirements.
A Non-U.S. Holder of Class A common stock eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
IRS.
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition of shares of our
Class A common stock unless (i) the gain is effectively connected with a trade
or business of the Non-U.S. Holder in the U.S., and, where a tax treaty
applies, is attributable to a U.S. permanent establishment of the Non-U.S.
Holder, (ii) in the case of a Non-U.S. Holder who is an individual and holds
the Class A common stock as a capital asset, is present in the U.S. for 183 or
more days in the taxable year of the sale or other disposition and select other
conditions are met or (iii) we are or have been a "U.S. real property holding
corporation" for U.S. federal income tax purposes.
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An individual Non-U.S. Holder described in clause (i) above will be subject
to tax on the net gain derived from the sale under regular graduated U.S.
federal income tax rates. An individual Non-U.S. Holder described in clause
(ii) above will be subject to a flat 30% tax on the gain derived from the sale,
which may be offset by U.S. source capital losses, even though the individual
is not considered a resident of the U.S.
We believe that we are not and do not anticipate becoming a "U.S. real
property holding corporation" for U.S. federal income tax purposes.
Federal Estate Tax
Class A common stock held by an individual Non-U.S. Holder at the time of
death will be included in the holder's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
We must report annually to the IRS and to each Non-U.S. Holder the amount of
dividends paid to the holder and the tax withheld with respect to their
dividends, regardless of whether withholding was required. Copies of the
information returns reporting the dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
A Non-U.S. Holder will be subject to back-up withholding unless applicable
certification requirements are met.
Payment of the proceeds of a sale of our Class A common stock within the
U.S. or conducted through U.S. related financial intermediaries is subject to
both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a Non-U.S. Holder, and the
payor does not have actual knowledge that the beneficial owner is a U.S.
person, or the holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
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PLAN OF DISTRIBUTION
We are offering an aggregate of 3,236,639 shares of our Class A common stock
to the designated managers and non-management employees of CB Richard Ellis
Services and one or more of its subsidiaries in the offerings, which includes
shares for direct ownership, shares to be held in the CB Richard Ellis Services
401(k) plan and shares underlying stock fund units in the CB Richard Ellis
Services deferred compensation plan. We will also grant to our designated
managers up to an aggregate of 1,820,397 options to acquire shares of our Class
A common stock.
Immediately prior to the merger and the consummation of the offerings, the
BLUM Funds have agreed to purchase for cash a minimum of 2,553,879 shares of
our Class B common stock at $16.00 per share. In addition, the BLUM Funds have
agreed to purchase for $16.00 per share in cash an additional number of shares
of our Class B common stock equal to (1) 3,236,639 shares minus (2) the number
of shares of our Class A common stock and stock fund units subscribed for in
the offerings made by this prospectus plus (3) the aggregate amount of full-
recourse notes delivered by designated managers in the offerings divided by
$16.00. The number of shares purchased by the BLUM Funds will be reduced by
241,885 shares, which is the sum of the 10 shares of CBRE Holding common stock
initially owned by RCBA Strategic and the 241,875 shares of CBRE Holding common
stock purchased by RCBA Strategic for $16.00 per share in connection with the
closing of the sale of 11 1/4% senior subordinated notes by BLUM CB Corp. After
the offerings are completed depending on the amount to which the offerings are
subscribed, the shares of our Class B common stock owned by the buying group
will be equal to between approximately 80% and 96% of our outstanding Class A
and Class B common stock, taken together. Only the members of the buying group
will have an opportunity to acquire shares of our Class B common stock.
We are offering an aggregate of 1,187,982 shares of our Class A common stock
to the designated managers and non-management employees for direct ownership.
In addition, under the circumstances described below, the designated managers
will be eligible to receive an aggregate of up to 1,820,397 options to acquire
our Class A common stock. Unless our board of directors determines otherwise, a
designated manager will receive a grant of a portion of these options only if
he or she subscribes for a minimum number of shares in the offering of Class A
common stock for direct ownership. The minimum number of shares that a
designated manager must subscribe for in order to receive an option grant is a
percentage of 625,000 shares that will be allocated to that designated manager
by our board of directors. The minimum number of shares that a designated
manager must subscribe for in order to receive a grant of options will be
reduced by the number of deferred compensation plan stock fund units acquired
by the designated manager at the closing of the offerings by the transfer of
account balances currently allocated to the deferred compensation plan
insurance fund. If a designated manager subscribes for at least his or her
minimum number of shares, then we will grant to the designated manager a
percentage of the 1,820,397 total options equal to the percentage of the
625,000 shares allocated to that designated manager. Subject to our right to
allocate the shares to be purchased if the offering is over-subscribed, a
designated manager may subscribe for more than the minimum number of shares
required to receive a grant of options. However, as long as the minimum number
of shares required to receive an option grant are subscribed for, the number of
options granted to the designated manager will be the same regardless of the
actual number of shares subscribed for.
In the event that the offering of shares for direct ownership is over-
subscribed, meaning we receive offers to purchase more than the 1,187,982
shares which we have set aside for this offering, we first will allocate a
sufficient number of shares to the designated managers to allow them to
subscribe for the minimum number of shares necessary to obtain grants of
options, as described below, and all remaining shares then will be allocated
proportionately among all participants in the offering of shares for direct
ownership based upon the total number of those shares for which we receive
subscriptions.
We are offering to all of our U.S. employees who are currently participants
in the CB Richard Ellis Services 401(k) plan up to 889,819 shares of our Class
A common stock to be held in the 401(k) plan, which will be amended to add this
new investment alternative. To participate in this offering, an employee must
either instruct the trustee of the 401(k) plan to sell existing investments
held by the employee in the 401(k) plan and
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use those proceeds to purchase shares in this offering for his or her 401(k)
account or use the proceeds received in the merger for shares of CB Richard
Ellis Services common stock held by the employee in the 401(k) plan, if any, to
purchase shares in this offering for his or her 401(k) plan account. No
employee may have more than 50% of his or her entire 401(k) plan account
balance invested in shares of our Class A common stock as of June 1, 2001. If
this offering is over-subscribed, the number of shares that each participating
employee is able to purchase will be reduced proportionately based upon the
total number of 401(k) plan shares for which we receive subscriptions.
The CB Richard Ellis Services deferred compensation plan has been amended to
provide that, after the merger, each stock fund unit will entitle its holder to
receive one share of our Class A common stock on a future distribution date
under the plan, rather than a share of CB Richard Ellis Services common stock.
Each of our current U.S. employees and our current independent contractors in
the states of California, New York, Illinois and Washington at the time of the
merger who holds stock fund units in the CB Richard Ellis Services deferred
compensation plan that have vested prior to the merger will be entitled to
convert the value of the stock fund unit into other investment alternatives
under the plan or continue to hold the stock fund units in the deferred
compensation plan. We are offering up to 996,338 shares of our Class A common
stock that are issuable upon a distribution under the deferred compensation
plan to those holders of stock fund units who elect to continue to hold the
stock fund units after the merger. In addition, our designated managers will
also have the right to transfer into stock fund units an aggregate of up to
$2.6 million of deferred compensation plan account balances that are currently
allocated to the insurance fund under the deferred compensation plan. As a
result, we are offering up to 162,500 shares of our Class A common stock that
are issuable to those holders of stock fund units upon future distribution
under the deferred compensation plan.
These securities are being sold directly by us, with no underwriters,
dealers or agents involved. Upon the effectiveness of the registration
statement relating to this offering, we will solicit subscriptions from our
employees by the distribution of this prospectus, as well as the offering
documents required for participation in each of the offerings. For more
information, see "Description of the Offering Documents."
Pursuant to the terms of the subscription agreements, each designated
manager or non-management employee purchasing shares of our Class A common
stock for direct ownership must accept and agree to be bound by significant
restrictions on transfer. Accordingly, we will place a legend on the stock
certificate stating that the transfer or other disposition of the shares
evidenced by the certificate is restricted pursuant to the subscription
agreements. The transfer restrictions terminate upon the earlier of ten years
after the closing of this offering and 180 days after the effectiveness of an
underwritten initial public offering pursuant to which our Class A common stock
is listed on a national securities exchange or the Nasdaq National Market.
The offering price of $16.00 per share for our Class A common stock is the
same price that is being paid to the CB Richard Ellis Services stockholders for
each of their shares of CB Richard Ellis Services common stock in the merger
and is the same cash price that is being paid by the BLUM Funds for the shares
of our Class B common stock that they will purchase under the contribution and
voting agreement. For more information see "The Merger Transactions--
Contribution and Voting Agreement."
There will be no trading market for our Class A common stock upon completion
of this offering. Our Class A common stock will not be listed on a national
securities exchange or authorized for quotation on the Nasdaq National Market
upon completion of the offerings. Accordingly, we cannot assure you that a
liquid trading market will develop for our Class A common stock in the future.
We estimate that the total expenses of the offerings will be approximately
$2.1 million. We will bear all costs, expenses and fees in connection with the
registration of our Class A common stock and options to acquire our Class A
common stock.
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LEGAL MATTERS
The validity of the shares of Class A common stock being offered will be
passed upon for us by Simpson Thacher & Bartlett, Palo Alto, California. The
compliance of the provisions of the CB Richard Ellis 401(k) Plan with the
requirements of the Internal Revenue Code of 1986, as amended, will be passed
upon for us by O'Melveny & Meyers LLP, Los Angeles, California.
EXPERTS
The audited consolidated balance sheet of CBRE Holding, Inc. and the audited
consolidated financial statements and schedule of CB Richard Ellis Services,
Inc. included in this prospectus and elsewhere in the registration statement to
the extent and for the periods indicated in their reports have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the shares of
the Class A common stock and options to acquire Class A common stock being
offered by this prospectus included in the registration statement. This
prospectus does not contain all of the information described in the
registration statement and the related exhibits and schedules. For further
information with respect to CBRE Holding and the Class A common stock and
options to acquire Class A common stock being offered, reference is made to the
registration statement and the related exhibits and schedule. Statements
contained in this prospectus regarding the contents of any contract or any
other document to which reference is made are not necessarily complete and, in
each instance, reference is made to the copy of the contract or other document
filed as an exhibit to the registration statement, each statement being
qualified in all respects by the reference. In addition, CB Richard Ellis
Services, which we will acquire in connection with the merger and whose
business immediately prior to the merger will be substantially the same as our
business immediately after the merger, files periodic and other reports with
the Commission under the Exchange Act of 1934.
Copies of each of the registration statement and the related exhibits and
schedule that we have filed and the reports that CB Richard Ellis Services has
filed may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048 and copies of
all or any part of the registration statement may be obtained from these
offices upon the payment of the fees prescribed by the Commission. Information
on the operation of the Public Reference Room may be obtained by calling the
Commission at 1-800-SEC-0330. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the site is http://www.sec.gov.
176
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
CBRE Holding, Inc.:
Consolidated Balance Sheets as of March 31, 2001 (Unaudited) and
February 20, 2001 ..................................................... F-2
Notes to Consolidated Financial Statements (Unaudited).................. F-3
Report of Independent Public Accountants................................ F-5
Consolidated Balance Sheet as of February 20, 2001...................... F-6
Notes to Consolidated Balance Sheet..................................... F-7
CB Richard Ellis Services, Inc.:
Consolidated Balance Sheets as of March 31, 2001 (Unaudited) and
December 31, 2000...................................................... F-9
Consolidated Statements of Operations for the three months ended March
31, 2001 and 2000 (Unaudited).......................................... F-10
Consolidated Statements of Cash Flows for the three months ended March
31, 2001 and 2000 (Unaudited).......................................... F-11
Notes to Consolidated Financial Statements (Unaudited).................. F-12
Report of Independent Public Accountants ............................... F-17
Consolidated Balance Sheets as of December 31, 2000 and 1999 ........... F-18
Consolidated Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998 ................................................... F-19
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998 ................................................... F-20
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998 ...................................... F-21
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2000, 1999 and 1998 ...................................... F-22
Notes to Consolidated Financial Statements ............................. F-23
Quarterly Results of Operations and Other Financial Data (Unaudited) ... F-45
FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts............................ F-46
All other schedules are omitted because either they are not applicable, not
required or the information required is included in the consolidated financial
statements, including the notes thereto.
F-1
CBRE HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
March 31, February 20,
2001 2001
----------- ------------
(Unaudited)
ASSETS
------
Cash.............................................. $160.00 $160.00
------- -------
Total assets.................................. $160.00 $160.00
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Total liabilities................................. $ -- $ --
Stockholders' equity
Common stock, $0.01 par value; 2,000 shares
authorized, 10 shares issued and outstanding .. 0.10 0.10
Additional paid-in capital........................ 159.90 159.90
------- -------
Total stockholders' equity.................... $160.00 $160.00
------- -------
Total liabilities and stockholders' equity.... $160.00 $160.00
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
1. Summary of Significant Accounting Policies
a. Organization and Description of Partnership
CBRE Holding, Inc., a Delaware corporation, was established on February 20,
2001, as BLUM CB Holding Corp. On March 26, 2001, BLUM CB Holding Corp. changed
its name to CBRE Holding, Inc. (the Company). The purpose of the Company is to
act as the acquiror in a transaction (the Merger) to acquire all of the
outstanding shares of CB Richard Ellis Services, Inc. (CBRE), an international
real estate services firm, for $16.00 per share in cash. The Company intends to
offer shares in the Company to certain managers and employees of CBRE. The
Company is a wholly-owned subsidiary of RCBA Strategic Partners, L.P. (RCBA
Strategic). RCBA Strategic is expected to control the Company after the Merger.
The accompanying consolidated balance sheet includes the accounts of the
Company and its wholly-owned subsidiary, BLUM CB Corporation (BLUM CB),
established October 27, 2000, formerly known as CB Radio Corp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
b. Proposed Acquisition of CBRE
On February 23, 2001, a contribution and voting agreement (the "Contribution
Agreement") was signed by the following persons and entities, who are referred
to together as the "buying group": RCBA Strategic Partners, L.P., FS Equity
Partners III, L.P. and FS Equity Partners International, L.P., Raymond Wirta,
Brett White, The Koll Holding Company and Frederic Malek. The Contribution
Agreement was amended on April 24, 2001 and further amended on May 31, 2001.
Each member of the buying group is either a current shareholder, senior
executive or director of CB Richard Ellis Services, Inc. or an affiliate of one
of the same. Pursuant to the contribution and voting agreement, immediately
prior to the Merger, each of the members of the buying group will contribute
all of the shares of CBRE common stock that it holds directly to the Company.
Each of these shares contributed to the Company will be cancelled, as a result
of the merger, and the Company will not receive any consideration for those
shares of CBRE common stock. The Company will issue one share of Class B common
stock in exchange for each share of CBRE common stock contributed by the buying
group. RCBA has also committed to provide up to $109.9 million in cash equity
to fund part of a portion of the CBRE Acquisition. This includes the purchase
of approximately 1.1 million shares of CBRE currently owned by entities related
to the general partner of RCBA for approximately $17.3 million which will be
subsequently contributed to the Company in exchange for the issuance of Class B
common stock of the Company, and the purchase of up to 5.8 million shares of
Class B common stock of the Company at $16.00 per share in cash to raise $92.6
million. Blum Strategic Partners II, L.P., a newly formed entity that is
related to the general partner of RCBA may satisfy a portion of this
commitment. Neither RCBA Strategic nor its general partner controls Blum
Strategic Partners II L.P.
On February 24, 2001, the Company announced that it had entered into a
merger agreement (the "Merger Agreement") providing for the acquisition of CBRE
by its wholly-owned subsidiary, Blum CB for $16.00 per share in cash. The
Merger Agreement was amended on April 24, 2001 and further amended on May 31,
2001. Upon completion of the Merger, CBRE will become a wholly owned subsidiary
of the Company.
The agreement provides that CBRE employees will have the option to roll over
their existing shares in CBRE's deferred compensation plan and a portion of
CBRE shares held in their 401(k) accounts. Employees will also be provided the
opportunity to make a direct equity investment in the Company.
The merger, which is expected to close early in the third quarter of
calendar 2001, remains subject to certain conditions, including the receipt of
the Company's debt financing and the approval of the merger by the holders of
two-thirds of the outstanding shares of CBRE not currently owned by the buying
group. CBRE will
F-3
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
pay a termination fee of $7.5 million and reimburse up to $3.0 million of the
Company's expenses if CBRE wishes to accept a superior acquisition proposal.
c. Commitments & Contingencies
In connection with the announcement of the Merger, BLUM CB and CBRE have
been subject to putative class action lawsuits. Between November 12 and
December 6, 2000, five putative class actions were filed in the Court of
Chancery of the State of Delaware in and for New Castle County by various
stockholders against CBRE, its directors and the buying group and their
affiliates. A similar action was also filed on November 17, 2000, in the
Superior Court of the State of California in and for the County of Los Angeles.
These actions all alleged that The Company's offering price was unfair and
inadequate and sought injunctive relief or rescission of the merger
transactions and, in the alternative, money damages.
The five Delaware actions were subsequently consolidated and a lead counsel
appointed. As of February 23, 2001, the parties to the Delaware litigation
entered into a memorandum of understanding in which they agreed in principle to
a settlement. The memorandum provides, among other things that:
1. The defendants admit no liability or wrongdoing whatsoever;
2. The buying group acknowledges that the pendency and prosecution of the
Delaware litigation were positive contributing factors to its decision
to increase the merger consideration;
3. For the lead counsel for the plaintiff to have an opportunity to review
the CBRE proxy statement before mailing;
4. For the certification of a settlement class and the entry of a final
judgment granting a full release of the defendants; and
5. For attorneys' fees in an amount not to exceed $380,000.
Conditions to the settlement proposed by the memorandum include:
1. Negotiation and execution of a mutually acceptable stipulation of
settlement;
2. Closing of the merger;
3. Dismissal of the Delaware and California litigation with prejudice; and
4. Completion by the plaintiffs of such reasonable additional discovery as
lead counsel reasonably believes is appropriate.
The parties may not be able to complete a mutually acceptable stipulation of
settlement, and, if so, the litigation will continue, which could have a
material adverse impact on the Company's ability to complete the Merger. In
addition, no agreements have been reached with respect to any settlement of the
California litigation, and if this litigation continues, it could have a
material adverse impact on the Company's ability to complete the Merger.
d. Subsequent Events
On June 7, 2001, BLUM CB issued $229.0 million in aggregate principal amount
of 11 1/4% senior subordinated notes due June 15, 2011 (the "Notes") for $225.6
million in the aggregate. The proceeds from the offering were deposited in an
escrow account and will be released to CBRE in connection with the completion
of the Merger. CBRE will assume the Notes if the Merger is completed. The notes
require semi-annual payments of interest with the outstanding principal balance
due in June 2011.
On June 7, 2001, the Company sold and issued 241,875 shares of Class B
common stock to RCBA Strategic for aggregate cash consideration of $3,870,000.
The purchase of these shares by RCBA Strategic will proportionately reduce the
$109.9 million in cash equity RCBA Strategic (see Note b) is committed to
purchase from the Company.
F-4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of CBRE Holding, Inc.:
We have audited the accompanying consolidated balance sheet of CBRE Holding,
Inc. (a Delaware corporation) as of February 20, 2001. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of CBRE Holding, Inc.
as of February 20, 2001, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Los Angeles, California
April 23 , 2001
F-5
CBRE HOLDING, INC.
CONSOLIDATED BALANCE SHEET
February 20,
2001
------------
ASSETS
------
Cash.......................................................... $160.00
-------
Total assets.............................................. $160.00
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Total liabilities............................................. $ --
Stockholders' equity
Common stock, $0.01 par value; 2,000 shares authorized, 10
shares issued and outstanding ............................. 0.10
Additional paid-in capital.................................... 159.90
-------
Total stockholders' equity................................ $160.00
-------
Total liabilities and stockholders' equity................ $160.00
=======
The accompanying notes are an integral part of this consolidated balance sheet.
F-6
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
1. Summary of Significant Accounting Policies
a. Organization and Description of Partnership
CBRE Holding, Inc., a Delaware corporation, was established on February 20,
2001, as BLUM CB Holding Corp. On March 26, 2001, BLUM CB Holding Corp. changed
its name to CBRE Holding, Inc. (the Company). The purpose of the Company is to
act as the acquiror in a transaction (the Merger) to acquire all of the
outstanding shares of CB Richard Ellis Services, Inc. (CBRE), an international
real estate services firm, for $16.00 per share in cash. The Company intends to
offer shares in the Company to certain managers and employees of CBRE. The
Company is a wholly-owned subsidiary of RCBA Strategic Partners, L.P. (RCBA
Strategic). RCBA Strategic, is expected to control the Company after the
Merger.
The accompanying consolidated balance sheet includes the accounts of the
Company and its wholly-owned subsidiary, BLUM CB Corporation (BLUM CB),
established October 27, 2000, formerly known as CB Radio Corp. All significant
intercompany accounts and transactions have been eliminated in consolidation.
b. Commitments & Contingencies
In connection with the announcement of the Merger, BLUM CB and CBRE have
been subject to putative class action lawsuits. Between November 12 and
December 6, 2000, five putative class actions were filed in the Court of
Chancery of the State of Delaware in and for New Castle County by various
stockholders against CBRE, its directors and the buying group and their
affiliates. A similar action was also filed on November 17, 2000, in the
Superior Court of the State of California in and for the County of Los Angeles.
These actions all alleged that The Company's offering price was unfair and
inadequate and sought injunctive relief or rescission of the merger
transactions and, in the alternative, money damages.
The five Delaware actions were subsequently consolidated and a lead counsel
appointed. As of February 23, 2001, the parties to the Delaware litigation
entered into a memorandum of understanding in which they agreed in principle to
a settlement. The memorandum provides, among other things that:
1. The defendants admit no liability or wrongdoing whatsoever;
2. The buying group acknowledges that the pendency and prosecution of the
Delaware litigation were positive contributing factors to its decision
to increase the merger consideration;
3. For the lead counsel for the plaintiff to have an opportunity to review
the CBRE proxy statement before mailing;
4. For the certification of a settlement class and the entry of a final
judgment granting a full release of the defendants; and
5. For attorneys' fees in an amount not to exceed $380,000.
Conditions to the settlement proposed by the memorandum include:
1. Negotiation and execution of a mutually acceptable stipulation of
settlement;
2. Closing of the merger;
3. Dismissal of the Delaware and California litigation with prejudice; and
4. Completion by the plaintiffs of such reasonable additional discovery as
lead counsel reasonably believes is appropriate.
The parties may not be able to complete a mutually acceptable stipulation of
settlement, and, if so, the litigation will continue, which could have a
material adverse impact on the Company's ability to complete the Merger.
F-7
CBRE HOLDING, INC.
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
c. Subsequent Event
On February 23, 2001, a contribution and voting agreement was signed by the
following persons and entities, who are referred to together as the "buying
group": RCBA Strategic Partners, L.P., FS Equity Partners III, L.P. and
FS Equity Partners International, L.P., Raymond Wirta, Brett White, The Koll
Holding Company and Frederic Malek.
Each member of the buying group is either a current shareholder, senior
executive or director of CB Richard Ellis Services, Inc. or an affiliate of one
of the same. Pursuant to the contribution and voting agreement, immediately
prior to the Merger, each of the members of the buying group will contribute
all of the shares of CBRE common stock that it holds directly to the Company.
Each of these shares contributed to the Company will be cancelled, as a result
of the merger, and the Company will not receive any consideration for those
shares of CBRE common stock. The Company will issue one share of Class B common
stock in exchange for each share of CBRE common stock contributed by the buying
group.
On February 24, 2001, the Company announced that it had entered into a
merger agreement providing for the acquisition of CBRE by its wholly-owned
subsidiary, Blum CB for $16.00 per share in cash.
The agreement provides that CBRE employees will have the option to roll over
their existing shares in CBRE's deferred compensation plan and a portion of
CBRE shares held in their 401(k) accounts. Employees will also be provided the
opportunity to make a direct equity investment in the Company.
The merger, which is expected to close early in the third quarter of
calendar 2001, remains subject to certain conditions, including the receipt of
the Company's debt financing, the approval of the merger by the holders of two-
thirds of the outstanding shares of CBRE not currently owned by the buying
group, the expiration or termination of waiting periods under applicable
antitrust laws and a successful tender offer for at least 51% of CBRE's
outstanding 8 7/8% Senior Subordinated Notes. CBRE will pay a termination fee
of $7.5 million and reimburse up to $3.0 million of the Company's expenses if
CBRE wishes to accept a superior acquisition proposal.
F-8
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
------
Current Assets:
Cash and cash equivalents............................ $ 20,339 $ 20,854
Receivables, less allowance for doubtful accounts of
$11,959 and $12,631 at March 31, 2001 and
December 31, 2000 .................................. 141,792 176,908
Prepaid expenses..................................... 9,819 8,017
Deferred taxes, net.................................. 13,105 11,139
Other current assets................................. 8,716 6,127
-------- --------
Total current assets................................. 193,771 223,045
Property and equipment, net........................... 75,048 75,992
Goodwill, net of accumulated amortization of $59,738
and $56,417 at March 31, 2001 and December 31, 2000.. 415,299 423,975
Other intangible assets, net of accumulated
amortization of $290,679 and $289,038 at March 31,
2001 and December 31, 2000........................... 44,169 46,432
Cash surrender value of insurance policies, deferred
compensation plan.................................... 61,267 53,203
Investment in and advances to unconsolidated
subsidiaries......................................... 38,187 41,325
Deferred taxes, net................................... 35,316 32,327
Prepaid pension costs................................. 24,126 25,235
Other assets.......................................... 44,113 41,571
-------- --------
Total assets......................................... $931,296 $963,105
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses................ $ 77,803 $ 83,673
Compensation and employee benefits payable........... 63,790 79,801
Accrued bonus and profit sharing..................... 20,807 107,878
Income taxes payable................................. 14,696 28,260
Short-term borrowings................................ 8,418 9,215
Current maturities of long-term debt................. 1,161 1,378
-------- --------
Total current liabilities............................ 186,675 310,205
Long-term debt:
Senior subordinated notes, less unamortized discount
of $1,604 and $1,664 at March 31, 2001 and December
31, 2000............................................ 173,396 173,336
Revolving credit facility............................ 218,000 110,000
Other long-term debt................................. 18,257 20,235
-------- --------
Total long-term debt................................. 409,653 303,571
Deferred compensation liability....................... 79,980 80,503
Other liabilities..................................... 27,729 29,739
-------- --------
Total liabilities.................................... 704,037 724,018
Minority interest..................................... 2,967 3,748
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value; 8,000,000 shares
authorized; no shares issued or outstanding......... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized; 20,636,051 and 20,605,023 shares
outstanding at March 31, 2001 and December 31,
2000................................................ 217 217
Additional paid-in capital........................... 365,420 364,168
Notes receivable from sale of stock.................. (11,661) (11,847)
Accumulated deficit.................................. (91,943) (89,097)
Accumulated other comprehensive loss................. (21,897) (12,258)
Treasury stock at cost, 1,072,155 shares at March 31,
2001 and December 31, 2000.......................... (15,844) (15,844)
-------- --------
Total stockholders' equity........................... 224,292 235,339
-------- --------
Total liabilities and stockholders' equity........... $931,296 $963,105
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except share and per share data)
Three Months Ended
March 31,
----------------------
2001 2000
---------- ----------
Revenue:
Leases............................................... $ 103,166 $ 99,753
Sales................................................ 73,843 74,281
Property and facilities management fees.............. 27,872 25,285
Consulting and referral fees......................... 16,367 16,314
Appraisal fees....................................... 18,836 16,284
Loan origination and servicing fees.................. 14,812 9,263
Investment management fees........................... 8,549 7,337
Other................................................ 9,053 12,402
---------- ----------
Total revenue...................................... 272,498 260,919
Costs and Expenses:
Commissions, fees and other incentives............... 124,398 113,963
Operating, administrative and other.................. 134,079 127,148
Depreciation and amortization........................ 11,696 10,569
---------- ----------
Operating income....................................... 2,325 9,239
Interest income........................................ 800 489
Interest expense....................................... 9,055 9,685
---------- ----------
(Loss) income before (benefit) provision for income
tax................................................... (5,930) 43
(Benefit) provision for income tax..................... (3,084) 23
---------- ----------
Net (loss) income...................................... $ (2,846) $ 20
========== ==========
Basic (loss) earnings per share........................ $ (0.13) $ --
========== ==========
Weighted average shares outstanding for basic (loss)
earnings per share.................................... 21,309,550 20,819,268
========== ==========
Diluted (loss) earnings per share...................... $ (0.13) $ --
========== ==========
Weighted average shares outstanding for diluted (loss)
earnings per share.................................... 21,309,550 20,851,184
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Three Months Ended
March 31,
-------------------
2001 2000
--------- --------
Cash flows from operating activities:
Net (loss) income........................................ $ (2,846) $ 20
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization excluding deferred
financing costs........................................ 11,696 10,569
Gain on sale of properties, businesses and servicing
rights................................................. (6,279) (4,735)
Deferred compensation deferrals......................... 11,113 8,513
Equity interest in earnings of unconsolidated
subsidiaries........................................... (1,042) (1,742)
Provision for doubtful accounts......................... 1,173 987
Decrease in receivables.................................. 27,920 20,973
Increase in cash surrender value of insurance policies,
deferred compensation plan.............................. (8,064) (10,751)
Decrease in compensation and employee benefits payable
and accrued bonus and profit sharing.................... (100,714) (87,165)
Decrease in accounts payable and accrued expenses........ (4,505) (6,783)
Decrease in income taxes payable......................... (17,632) (5,463)
(Decrease) increase in other liabilities................. (11,664) 1,777
Other.................................................... (3,419) 6,278
--------- --------
Net cash used in operating activities.................. (104,263) (67,522)
--------- --------
Cash flows from investing activities:
Purchases of property and equipment...................... (6,639) (4,538)
Proceeds from sale of properties, businesses and
servicing rights........................................ 6,105 11,304
Distributions from (contributions to) investments in and
advances to unconsolidated subsidiaries, net............ 3,276 (711)
Other investing activities, net.......................... (3,278) 259
--------- --------
Net cash (used in) provided by investing activities.... (536) 6,314
--------- --------
Cash flows from financing activities:
Proceeds from revolving credit facility.................. 142,000 88,000
Repayment of revolving credit facility................... (34,000) (27,000)
Repayment of senior notes and other loans, net........... (2,786) (1,168)
Other financing activities, net.......................... (274) (1,038)
--------- --------
Net cash provided by financing activities.............. 104,940 58,794
--------- --------
Net increase (decrease) in cash and cash equivalents..... 141 (2,414)
Cash and cash equivalents, at beginning of period........ 20,854 27,844
Effect of exchange rate changes on cash.................. (656) (639)
--------- --------
Cash and cash equivalents, at end of period.............. $ 20,339 $ 24,791
========= ========
Supplemental data:
Cash paid during the period for:
Interest (none capitalized)............................. $ 3,733 $ 6,074
Income taxes, net....................................... $ 14,575 $ 5,376
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
CB Richard Ellis Services, Inc. (the Company), was founded in 1906. It is a
holding company that conducts its worldwide operations through approximately 75
direct and indirect subsidiaries. Approximately 77% of the Company's revenues
are from the United States and 23% from the rest of the world. On February 24,
2001, the Company announced that it had entered into an Agreement and Plan of
Merger with CBRE Holding, Inc. and Blum CB Corporation, which was amended and
restated as of April 24, 2001, whereby members of senior management, Ray Wirta,
CEO, and Brett White, Chairman, The Americas, together with director, Fred
Malek and directors, Richard Blum, Bradford Freeman and Donald Koll and their
respective affiliates will acquire all of the Company's outstanding shares
which they do not own at a price of $16.00 per share. The acquisition, which is
expected to close in July of 2001, remains subject to certain conditions,
including, among others, the receipt of debt financing by CBRE Holding, Inc.
and the Company, the approval of the merger by the holders of two-thirds of the
outstanding shares of the Company not owned by the buying group, the expiration
or termination of waiting periods under applicable antitrust laws and a
successful tender offer for at least 51% of the Company's outstanding 8 7/8%
Senior Subordinated Notes. The Company will pay a termination fee of $7.5
million and reimburse up to $3.0 million of the buying group's expenses if it
wishes to accept a superior acquisition proposal.
2. Basis of Preparation
The accompanying unaudited consolidated financial statements include all
information and footnotes required for interim financial statement
presentation. In the Company's opinion, 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 requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ materially from those
estimates. All significant intercompany transactions and balances have been
eliminated and certain reclassifications have been made to prior periods'
consolidated financial statements to conform to current period presentation.
The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results of operations to be expected for the year
ending December 31, 2001.
3. Investments in and Advances to Unconsolidated Subsidiaries
Condensed Statement of Operations (unaudited) for the unconsolidated
subsidiaries accounted for using the equity method is as follows (in
thousands):
Three Months
Ended March 31,
---------------
2001 2000
------- -------
Revenues.................................................... $69,649 $48,496
Income from operations...................................... 12,689 13,219
Net income.................................................. 7,846 8,957
4. Debt
The Company has a revolving credit facility of $270.0 million, which is
subject to a mandatory reduction of $70.0 million on December 31, 2001 and
expires on May 20, 2003. The amount outstanding under this facility totaled
$218.0 million at March 31, 2001. Interest rate alternatives include Bank of
America's reference
F-12
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
rate plus 1.00% and LIBOR plus 2.00%. The weighted average interest rate on
amounts outstanding at March 31, 2001 and December 31, 2000 was 7.69% and
8.79%, respectively.
The revolving credit facility contains numerous restrictive covenants that,
among other things, limit the Company's ability to incur or repay other
indebtedness, make advances or loans to subsidiaries and other entities, make
capital expenditures, incur liens, enter into mergers or effect other
fundamental corporate transactions, sell its assets, or declare dividends. In
addition, the Company is required to meet certain ratios relating to its
adjusted net worth, level of indebtedness, fixed charges and interest coverage.
The Company has outstanding 8 7/8% Senior Subordinated Notes due on June 1,
2006. The 8 7/8% Senior Subordinated Notes are redeemable in whole or in part
after June 1, 2002 at 104.438% of par on that date and at declining prices
thereafter. On or before June 1, 2001, up to 35.0% of the issued amount may be
redeemed at 108.875% of par plus accrued interest solely with the proceeds from
an equity offering. The amount included in the accompanying Consolidated
Balance Sheet less unamortized discount was $173.4 million at March 31, 2001.
The Company has short-term borrowings of $8.4 million and $9.2 million with
related weighted average interest rates of 7.0% and 7.3% as of March 31, 2001
and December 31, 2000, respectively.
The Company has a credit agreement with Residential Funding Corporation
(RFC). The credit agreement provides for a revolving line of credit of up to
$100.0 million, and bears interest at 1.00% per annum over LIBOR. The agreement
expires on August 31, 2001. During the quarter, the Company had a maximum of
$91.6 million revolving line of credit principal outstanding. At March 31,
2001, the Company had $0.6 million revolving line of credit principal
outstanding.
5. Commitments and Contingencies
Between November 12, and December 6, 2000, five putative class actions were
filed in the Court of Chancery of the State of Delaware in and for New Castle
County by various of the Company's stockholders against the Company, its
directors and the group which has proposed to take the Company private. A
similar action was also filed on November 17, 2000 in the Superior Court of the
State of California in and for the County of Los Angeles. These actions all
alleged that the offering price for the going private transaction was unfair
and inadequate and sought injunctive relief or rescission of the merger
transactions and, in the alternative, money damages.
The five Delaware actions have been consolidated. As of February 23, 2001,
the parties to the Delaware litigation entered into a memorandum of
understanding in which they agreed in principle to a settlement. The memorandum
provides, among other things:
. that the defendants admit no liability or wrongdoing whatsoever;
. that the members of the going private group acknowledge that the pendency
and prosecution of the Delaware litigation were positive contributing
factors to its decision to increase the merger consideration;
. for the certification of a settlement class and the entry of a final
judgment granting a full release of the defendants; and
. for attorneys' fees in an amount not to exceed $380,000.
There are numerous conditions to the settlement proposed by the memorandum
including the closing of the merger.
F-13
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The parties may not be able to complete a mutually acceptable stipulation of
settlement, and, if so, the litigation will continue. In addition, no
agreements have been reached with respect to any settlement of the California
action.
In December 1996, GMH Associates, Inc. (GMH) filed a lawsuit against
Prudential Realty Group (Prudential) and the Company in Superior Court of
Pennsylvania, Franklin County, alleging various contractual and tort claims
against Prudential, the seller of a large office complex, and the Company, its
agent in the sale, contending that Prudential breached its agreement to sell
the property to GMH, breached its duty to negotiate in good faith, conspired
with the Company to conceal from GMH that Prudential was negotiating to sell
the property to another purchaser and that Prudential and the Company
misrepresented that there were no other negotiations for the sale of the
property. Following a non-jury trial, the court rendered a decision in favor of
GMH and against Prudential and the Company, awarding GMH $20.3 million in
compensatory damages, against Prudential and the Company jointly and severally,
and $10.0 million in punitive damages, allocating the punitive damage award
$7.0 million as against Prudential and $3.0 million as against the Company.
Following the denial of motions by Prudential and the Company for a new trial,
a judgment was entered on December 3, 1998. Prudential and the Company filed an
appeal of the judgment. On March 3, 2000, the appellate court in Pennsylvania
reversed all of the trial courts' decisions finding that liability was not
supported on any theory claimed by GMH and directed that a judgment be entered
in favor of the defendants including the Company. The plaintiff filed an appeal
with the Pennsylvania Supreme Court which was denied. The plaintiff has
exhausted all appeal possibilities and judgment has been entered in favor of
all defendants.
In August 1993, a former commissioned sales person of the Company filed a
lawsuit against the Company in the Superior Court of New Jersey, Bergen County,
alleging gender discrimination and wrongful termination by the Company. On
November 20, 1996, a jury returned a verdict against the Company, awarding $1.5
million in general damages and $5.0 million in punitive damages to the
plaintiff. Subsequently, the trial court awarded the plaintiff $0.6 million in
attorneys' fees and costs. Following denial by the trial court of the Company's
motions for a new trial, reversal of the verdict and reduction of damages, the
Company filed an appeal of the verdict and requested a reduction of damages. On
March 9, 1999 the appellate court ruled in the Company's favor, reversed the
trial court's decision and ordered a new trial. On February 16, 2000, the
Supreme Court of New Jersey reversed the decision of the appellate court,
concluded that the general damage award in the trial court should be sustained
and returned the case to the appellate court for a determination as to whether
a new trial should be ordered on the issue of punitive damages. In April 2000,
the Company settled the compensatory damages claim, including interest, and all
claims to date with respect to attorneys fees by paying to the plaintiff the
sum of $2.75 million leaving only the punitive damage claim for resolution. The
plaintiff also agreed, with very limited exceptions, that no matter what the
outcome of the punitive damage claim the Company would not be responsible for
more than 50% of the plaintiff's future attorney fees. In February 2001, the
Company settled all remaining claims for the sum of $2.0 million and received a
comprehensive release.
The Company is a party to a number of pending or threatened lawsuits arising
out of, or incident to, its ordinary course of business. Based on available
cash and anticipated cash flows, the Company believes that the ultimate outcome
will not have an impact on the Company's ability to carry on its operations.
Management believes that any liability that may result from disposition of
these lawsuits will not have a material effect on the Company's consolidated
financial position or results of operations.
An important part of the strategy for the Company's investment management
business involves investing its own capital in certain real estate investments
with its clients. As of March 31, 2001, the Company had committed $40.6 million
to fund future co-investments.
F-14
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. Comprehensive Loss
Comprehensive loss consists of net income (loss) and other comprehensive
loss. Accumulated other comprehensive loss consists of foreign currency
translation adjustments. For the three months ended March 31, 2001, total
comprehensive loss was $12.5 million, which consists of foreign currency
translation loss of $9.6 million. For the three months ended March 31, 2000,
total comprehensive loss was $3.2 million, which consists of foreign currency
translation loss.
7. Per Share Information
Basic (loss) earnings per share was computed by dividing net (loss) income
by the weighted average number of common shares outstanding of 21,309,550 and
20,819,268 for the three months ended March 31, 2001 and 2000, respectively. As
a result of operating losses incurred for the three months ended March 31,
2001, diluted weighted average shares outstanding do not give effect to common
stock equivalents, as to do so would be anti-dilutive. At March 31, 2000, the
computation of diluted earnings per share further assumes the dilutive effect
of 31,916 common stock equivalents, which consisted principally of stock
options.
8. Industry Segments
The Company reports its operations through three business segments:
Transaction Management, Financial Services and Management Services. The Company
has a number of lines of business which are aggregated, reported and managed
through these three segments. The Transaction Management segment is the
Company's largest generator of revenue and includes Brokerage Services,
Corporate Services and Investment Property activities. Brokerage Services
includes activities that provide sales, leasing and consulting services in
connection with commercial real estate and is the Company's primary revenue
source. Corporate Services focuses on building relationships with large
corporate clients which generate recurring revenue. Investment Property
activities provide brokerage services for commercial real property marketed for
sale to institutional and private investors. The Financial Services segment
provides commercial mortgage, valuation, investment management and consulting
and research services. The current year results of Financial Services include a
nonrecurring pre-tax gain of $5.6 million from the sale of mortgage fund
management contracts. The Management Services segment provides facility
management services to corporate real estate users and property management and
related services to owners. Prior year quarter includes a $4.7 million
nonrecurring pre-tax gain on the sale of certain non-strategic assets.
F-15
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following unaudited table summarizes the revenue, cost and expenses, and
operating (loss) income by operating segment for the three months ended March
31, 2001 and 2000:
Three Months
Ended March 31
------------------
2001 2000
-------- --------
(Dollars in
thousands)
Revenue
Transaction Management.................................... $179,981 $178,459
Financial Services........................................ 55,919 41,397
Management Services....................................... 36,598 41,063
-------- --------
$272,498 $260,919
======== ========
Operating (loss) income
Transaction Management.................................... $ (4,130) $ 4,631
Financial Services........................................ 6,849 805
Management Services....................................... (394) 3,803
-------- --------
2,325 9,239
Interest income............................................. 800 489
Interest expense............................................ 9,055 9,685
-------- --------
(Loss) income before (benefit) provision for income tax..... $ (5,930) $ 43
======== ========
Geographic Information
Revenue
Americas
United States........................................... $211,009 $198,500
Canada, South and Central America....................... 11,504 9,199
-------- --------
222,513 207,699
Pacific................................................... 7,690 8,014
Asia...................................................... 9,015 9,733
Europe, Middle East and Africa............................ 33,280 35,473
-------- --------
$272,498 $260,919
======== ========
F-16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of CB Richard Ellis Services, Inc.:
We have audited the accompanying consolidated balance sheets of CB Richard
Ellis Services, Inc. (a Delaware corporation) as of December 31, 2000, and
1999, and the related consolidated statements of operations, stockholders'
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CB Richard Ellis Services,
Inc. as of December 31, 2000, and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a required part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
February 24, 2001
F-17
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
December 31
-------------------
2000 1999
-------- ---------
ASSETS
------
Current Assets:
Cash and cash equivalents.............................. $ 20,854 $ 27,844
Receivables, less allowance for doubtful accounts of
$12,631 and $15,560 at December 31, 2000 and 1999..... 176,908 168,276
Prepaid expenses....................................... 8,017 8,370
Deferred taxes, net.................................... 11,139 11,758
Other current assets................................... 6,127 10,596
-------- ---------
Total current assets.................................. 223,045 226,844
Property and equipment, net.............................. 75,992 70,149
Goodwill, net of accumulated amortization of $56,417 and
$41,008 at December 31, 2000 and 1999................... 423,975 445,010
Other intangible assets, net of accumulated amortization
of $289,038 and $279,156 at December 31, 2000 and 1999.. 46,432 57,524
Cash surrender value of insurance policies, deferred
compensation plan....................................... 53,203 20,442
Investment in and advances to unconsolidated
subsidiaries............................................ 41,325 38,514
Deferred taxes, net...................................... 32,327 28,190
Prepaid pension costs.................................... 25,235 26,323
Other assets............................................. 41,571 16,487
-------- ---------
Total assets.......................................... $963,105 $ 929,483
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses.................. $ 83,673 $ 81,068
Compensation and employee benefits..................... 79,801 84,357
Accrued bonus and profit sharing....................... 107,878 81,394
Income taxes payable................................... 28,260 18,429
Current maturities of long-term debt................... 10,593 6,765
-------- ---------
Total current liabilities............................. 310,205 272,013
Long-term debt:
Senior subordinated notes, less unamortized discount of
$1,664 and $1,892 at December 31, 2000 and 1999....... 173,336 173,108
Revolving credit facility.............................. 110,000 160,000
Other long-term debt................................... 20,235 24,764
-------- ---------
Total long-term debt.................................. 303,571 357,872
Deferred compensation liability.......................... 80,503 47,202
Other liabilities........................................ 29,739 38,787
-------- ---------
Total liabilities..................................... 724,018 715,874
Minority interest........................................ 3,748 3,872
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value; 8,000,000 shares
authorized; no shares issued or outstanding........... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized; 20,605,023 and 20,435,692 shares issued
and outstanding at December 31, 2000 and 1999......... 217 213
Additional paid-in capital............................. 364,168 355,893
Notes receivable from sale of stock.................... (11,847) (8,087)
Accumulated deficit.................................... (89,097) (122,485)
Accumulated other comprehensive loss................... (12,258) (1,928)
Treasury stock at cost, 1,072,155 and 885,100 shares at
December 31, 2000 and 1999............................ (15,844) (13,869)
-------- ---------
Total stockholders' equity............................ 235,339 209,737
-------- ---------
Total liabilities and stockholders' equity............ $963,105 $ 929,483
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
Year Ended December 31
--------------------------------
2000 1999 1998
---------- ---------- ----------
Revenue:
Leases.................................... $ 539,419 $ 448,091 $ 371,300
Sales..................................... 389,745 394,718 357,718
Property and facilities management fees... 110,654 110,111 86,379
Consulting and referral fees.............. 78,714 73,569 72,586
Appraisal fees............................ 75,055 71,050 48,082
Loan origination and servicing fees....... 58,190 45,940 39,402
Investment management fees................ 42,475 28,929 33,145
Other..................................... 29,352 40,631 25,891
---------- ---------- ----------
Total revenue........................... 1,323,604 1,213,039 1,034,503
Costs and Expenses:
Commissions, fees and other incentives.... 634,639 559,289 458,463
Operating, administrative and other....... 538,481 536,381 448,794
Merger-related and other nonrecurring
charges.................................. -- -- 16,585
Depreciation and amortization............. 43,199 40,470 32,185
---------- ---------- ----------
Operating income............................ 107,285 76,899 78,476
Interest income............................. 2,554 1,930 3,054
Interest expense............................ 41,700 39,368 31,047
---------- ---------- ----------
Income before provision for income tax...... 68,139 39,461 50,483
Provision for income tax.................... 34,751 16,179 25,926
---------- ---------- ----------
Net income.................................. $ 33,388 $ 23,282 $ 24,557
========== ========== ==========
Deemed dividend on preferred stock.......... $ -- $ -- $ 32,273
========== ========== ==========
Net income (loss) applicable to common
stockholders............................... $ 33,388 $ 23,282 $ (7,716)
========== ========== ==========
Basic earnings (loss) per share............. $ 1.60 $ 1.11 $ (0.38)
========== ========== ==========
Weighted average shares outstanding for
basic earnings (loss) per share............ 20,931,111 20,998,097 20,136,117
========== ========== ==========
Diluted earnings (loss) per share........... $ 1.58 $ 1.10 $ (0.38)
========== ========== ==========
Weighted average shares outstanding for
diluted earnings (loss) per share.......... 21,097,240 21,072,436 20,136,117
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income.................................... $ 33,388 $ 23,282 $ 24,557
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization excluding
deferred financing costs................... 43,199 40,470 32,185
Amortization of deferred financing costs.... 2,069 1,696 1,184
Deferred compensation deferrals............. 43,557 25,932 14,738
(Gain) loss on sale of properties,
businesses and servicing rights............ (10,184) (9,865) 2,058
Equity interest in earnings of
unconsolidated subsidiaries................ (7,112) (7,528) (3,443)
Minority interest........................... 607 2,016 730
Provision for litigation, doubtful accounts
and other.................................. 5,125 4,724 5,185
Deferred income tax (benefit) provision..... (4,083) (12,688) 14,394
Increase in receivables....................... (12,545) (37,640) (24,846)
Increase in cash surrender value of insurance
policies, deferred compensation plan......... (32,761) (20,442) --
Increase in compensation and employee benefits
payable and accrued bonus and profit share... 24,418 37,339 7,782
(Decrease) increase in accounts payable and
accrued expenses............................. (3,201) 1,346 2,615
Increase in income taxes payable.............. 11,074 16,696 8,913
(Decrease) increase in other liabilities...... (9,553) 7,583 (9,536)
Net change in other operating assets and
liabilities............................... 114 1,090 98
--------- --------- ---------
Net cash provided by operating activities.. 84,112 74,011 76,614
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........... (26,921) (35,130) (29,715)
Proceeds from sale of inventoried property.... -- 7,355 --
Proceeds from sale of properties, businesses
and servicing rights......................... 17,495 12,072 --
Purchase of investments....................... (23,413) (1,019) --
Increase in intangible assets and goodwill.... (3,119) (5,331) (14,595)
Acquisition of businesses including net assets
acquire intangibles and goodwill............. (3,442) (8,931) (189,895)
Other investing activities, net............... 3,678 4,217 10,685
--------- --------- ---------
Net cash used in investing activities...... (35,722) (26,767) (223,520)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from revolving credit facility....... 179,000 165,000 315,000
Repayment of revolving credit facility........ (229,000) (172,000) (268,000)
Proceeds from senior subordinated term loan... -- -- 172,788
Repayment of inventoried property loan........ -- (7,093) (377)
Proceeds from (repayment of) senior notes and
other loans, net............................. 588 (12,402) (14,324)
Payment of dividends payable.................. -- -- (5,000)
Repurchase of preferred stock................. -- -- (72,331)
Repurchase of common stock.................... (2,018) (4,986) (8,883)
Repayment of capital leases................... (1,373) (1,340) (1,655)
Minority interest payments.................... (2,180) (3,801) (2,902)
Other financing activities, net............... 1,460 (1,099) 5,122
--------- --------- ---------
Net cash (used in) provided by financing
activities................................ (53,523) (37,721) 119,438
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (5,133) 9,523 (27,468)
Cash and cash equivalents, at beginning of
period....................................... 27,844 19,551 47,181
Effect of exchange rate changes on cash....... (1,857) (1,230) (162)
--------- --------- ---------
Cash and cash equivalents, at end of period... $ 20,854 $ 27,844 $ 19,551
========= ========= =========
Supplemental data:
Cash paid during the period for:
Interest (none capitalized)................. $ 38,352 $ 36,997 $ 27,528
Income taxes, net........................... $ 27,607 $ 12,689 $ 3,395
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Notes Accumulated
Additional receivable other
Preferred Common Paid-in from sale Accumulated comprehensive Treasury
Stock Stock capital of stock deficit income (loss) stock Total
--------- ------ ---------- ---------- ----------- ------------- -------- --------
Balance, December 31,
1997................... $ 40 $188 $333,981 $ (5,956) $(170,324) $ (158) $ -- $157,771
Net income.............. -- -- -- -- 24,557 -- -- 24,557
Common stock issued for
incentive plans........ -- 1 962 (962) -- -- -- 1
Contributions, deferred
compensation plan...... -- -- 5,361 -- -- -- -- 5,361
Collection on, net of
cancellation of notes
receivable from
employee stock
incentive plan......... -- -- (646) 1,264 -- -- -- 618
Common stock issued for
REI and HP
acquisitions........... -- 15 58,486 -- -- -- -- 58,501
Shares issued for
Capital Accumulation
Plan................... -- -- 2,889 -- -- -- -- 2,889
Common stock options
exercised.............. -- 7 8,835 -- -- -- -- 8,842
Amortization of cheap
stock.................. -- -- 312 -- -- -- -- 312
Tax deduction from
issuance of stock...... -- -- 11,907 -- -- -- -- 11,907
Foreign currency
translation gain....... -- -- -- -- -- 1,297 -- 1,297
Purchase of preferred
stock.................. (40) -- (72,291) -- -- -- -- (72,331)
Purchase of common
stock.................. -- -- -- -- -- -- (8,883) (8,883)
---- ---- -------- -------- --------- -------- -------- --------
Balance, December 31,
1998................... -- 211 349,796 (5,654) (145,767) 1,139 (8,883) 190,842
Net income.............. -- -- -- -- 23,282 -- -- 23,282
Common stock issued for
incentive plans........ -- 2 2,534 (2,534) -- -- -- 2
Contributions, deferred
compensation plan...... -- -- 2,094 -- -- -- -- 2,094
Collection on, net of
cancellation of notes
receivable from
employee stock
incentive plan......... -- -- -- 101 -- -- -- 101
Common stock options
exercised.............. -- -- 449 -- -- -- -- 449
Amortization of cheap
stock.................. -- -- 312 -- -- -- -- 312
Tax deduction from
issuance of stock...... -- -- 708 -- -- -- -- 708
Foreign currency
translation loss....... -- -- -- -- -- (3,067) -- (3,067)
Purchase of common
stock.................. -- -- -- -- -- -- (4,986) (4,986)
---- ---- -------- -------- --------- -------- -------- --------
Balance, December 31,
1999................... -- 213 355,893 (8,087) (122,485) (1,928) (13,869) 209,737
Net income.............. -- -- -- -- 33,388 -- -- 33,388
Common stock issued for
incentive plans........ -- 4 4,310 (4,310) -- -- -- 4
Contributions, deferred
compensation plan...... -- -- 2,729 -- -- -- -- 2,729
Deferred compensation
plan co-match.......... -- -- 907 -- -- -- -- 907
Collection on, net of
cancellation of notes
receivable from
employee stock
incentive plan......... -- -- (550) 550 -- -- -- --
Amortization of cheap
and restricted stock... -- -- 342 -- -- -- -- 342
Tax deduction from
issuance of stock...... -- -- 580 -- -- -- -- 580
Foreign currency
translation loss....... -- -- -- -- -- (10,330) -- (10,330)
Purchase of common
stock.................. -- -- (43) -- -- -- (1,975) (2,018)
---- ---- -------- -------- --------- -------- -------- --------
Balance, December 31,
2000................... $ -- $217 $364,168 $(11,847) $ (89,097) $(12,258) $(15,844) $235,339
==== ==== ======== ======== ========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Year Ended December 31
--------------------------
2000 1999 1998
-------- ------- -------
Net income.......................................... $ 33,388 $23,282 $24,557
Other comprehensive (loss) income net of tax........ (10,330) (3,067) 1,297
-------- ------- -------
Comprehensive income................................ $ 23,058 $20,215 $25,854
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
CB Richard Ellis Services, Inc. (the Company) and majority owned and controlled
subsidiaries. The equity attributable to minority shareholders' interests in
subsidiaries is shown separately in the balance sheets. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company's investments in unconsolidated subsidiaries in which it has the
ability to exercise significant influence over operating and financial
policies, but does not control, are accounted for by using the equity method.
Accordingly, the Company's share of the earnings of these equity basis
companies is included in consolidated net income. All other investments held on
a long-term basis are valued at cost less any permanent impairment in value.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
an original maturity of less than three months. The Company controls certain
cash and cash equivalents as agent for its investment and property management
clients. These amounts are not included in the consolidated balance sheets.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price of an acquisition over
the Company's interest in the fair value of the net identifiable assets
acquired. Goodwill is carried at cost less accumulated amortization and
amortized on a straight-line basis. Net goodwill at December 31, 2000 consisted
of $405.7 million related to the 1995 through 2000 acquisitions which is being
amortized over an estimated useful life of 30 years and $18.3 million related
to the Company's original acquisition in 1989 which is being amortized over an
estimated useful life of 40 years.
Net other intangible assets at December 31, 2000 included $6.0 million of
deferred financing costs and $40.4 million of intangibles stemming from the
1995 through 2000 acquisitions. These are amortized on a straight-line basis
over the estimated useful lives of the assets up to 12 years.
The Company periodically evaluates the recoverability of the carrying amount
of goodwill and other intangible assets. In this assessment, the Company
considers macro market conditions and trends in the Company's relative market
position, its capital structure, lender relationships and the estimated
undiscounted future cash flows associated with these assets. If any of the
significant assumptions inherent in this assessment materially change due to
market, economic and/or other factors, the recoverability is assessed based on
the revised assumptions and resultant undiscounted cash flows. If the analysis
indicates impairment, it would be recorded in the period the changes occur
based on the fair value of the goodwill and other intangible assets.
Property, Plant and Equipment
The Company capitalizes expenditures that materially increase the life of
the related assets and charges the cost of maintenance and repairs to expense.
Upon sale or retirement, the capitalized costs and related accumulated
depreciation or amortization are eliminated from the respective accounts, and
the resulting gain or loss is included in operating income.
Depreciation is computed primarily using the straight line method over
estimated useful lives ranging from 3 to 10 years. Leasehold improvements are
amortized over the term of the respective leases, excluding options
F-23
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to renew. Equipment under capital leases is depreciated over the related term
of the leases. The Company periodically reviews property, plant and equipment
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If any of the significant
assumptions inherent in this assesment materially change due to market,
economics, and/or other factors, the recoverability is assessed based on the
revised assumptions. If this analysis indicates that such assets are considered
to be impaired, the impairment is recognized in the period the changes occur
and is measured by the amount in which the carrying value exceeds the fair
value of the asset.
Income Recognition
Real estate commissions on sales are recorded as income upon close of escrow
or upon transfer of title. Real estate commissions on leases are generally
recorded as income once the Company satisfies all obligations under the
commission agreement, which generally occurs upon the earlier of the date of
occupancy or cash receipt, if cash is received prior to occupancy. The
existence of any significant future contingencies will result in the delay of
recognition of income until such contingency is satisfied. If, for example, the
tenant has a free rent period, lease revenue is not recorded until the first
month's rent is paid. Investment management fees and management fees are
recognized when earned under the provisions of the related agreements.
Appraisal fees are recorded after services have been rendered. Loan origination
fees are recognized at the time the loan closes and the Company has no
significant remaining obligations for performance in connection with the loan
transaction, while loan servicing fees are recorded as principal and interest
payments are collected from mortgagors. Other commissions and fees are recorded
as income at the time the related services have been performed unless
significant future contingencies exist. The adoption of Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," did not have a
material effect on our operations or financial position.
Foreign Currencies
The financial statements of subsidiaries located outside the United States
(US) are generally measured using the local currency as the functional
currency. The assets and liabilities of these subsidiaries are translated at
the rates of exchange at the balance sheet date and income and expenses are
translated at the average monthly rate. The currency effects of translating the
financial statements of these non-US operations of the Company are included in
the "Accumulated other comprehensive income (loss)" component of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in the results of operations. The aggregate transaction gains and
losses included in the consolidated statements of operations are a $3.1 million
loss, $1.1 million gain and $0.2 million loss for 2000, 1999 and 1998,
respectively.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income
(loss). Accumulated other comprehensive income (loss) consists of foreign
currency translation adjustments.
Accounting for Transfers and Servicing
The Company follows Statement of Financial Accounting Standards (SFAS) No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments in accounting for loan sales and acquisition of servicing
rights. Under SFAS No. 125, the Company is required to recognize, at fair
value, financial and servicing assets it has acquired control over and related
liabilities it has incurred and amortize them over the period of estimated net
servicing income or loss. Write-off of the asset is required when control is
surrendered. The fair value of these servicing rights resulted in a gain, which
is reflected in the Consolidated Statements of Operations, with a corresponding
servicing asset of approximately $0.7 million and $0.8 million, at December 31,
2000 and 1999, respectively, which is reflected in the Consolidated Balance
Sheets.
F-24
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the US requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of certain revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Management believes that these estimates provide a reasonable basis
for the fair presentation of its financial condition and results of operations.
Stock Based Compensation
The Company has elected to apply the provisions of Accounting Principles
Board (APB) Opinion No. 25 and provide the pro forma disclosure requirements of
SFAS No. 123, Accounting for Stock Based Compensation in the footnotes to its
consolidated financial statements. SFAS No. 123 requires pro forma disclosure
of net income and, if presented, earnings per share, as if the fair-value based
method of accounting defined in this statement had been applied. APB Opinion
No. 25 and related interpretations require accounting for stock compensation
awards based on their intrinsic value as of the grant date.
Income Taxes
Income taxes are accounted for under the asset and liability method in
accordance with SFAS 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are determined based on temporary differences between financial
reporting and tax basis of assets and liabilities and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured by
applying enacted tax rates and laws to taxable income in the years in which the
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS 140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral established by SFAS 125. In
addition, this statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company does
not perform these types of transactions. This statement is effective for all
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company is evaluating the impact of SFAS
140 on its results of operation and financial position for these types of
transactions.
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities--an Amendment of
FASB Statement No. 133. SFAS No. 138 amends the accounting and reporting for
certain derivative instruments and hedging activities and is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 138 is
not expected to have a material impact on earnings or other components of
comprehensive income of the Company.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133, which deferred the effective date of SFAS No. 133 for one
year. SFAS No. 137 is effective for all fiscal quarters of all fiscal years
beginning after
F-25
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 15, 2000. SFAS No. 137 is not anticipated to have a material impact on
earnings or other components of comprehensive income as the Company had no
derivatives outstanding at December 31, 2000.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
not expected to have a material impact on earnings or other components of
comprehensive income as the Company had no derivatives outstanding at December
31, 2000.
Reclassifications
Some reclassifications, which do not have an effect on net income, have been
made to the 1999 and 1998 financial statements to conform to the 2000
presentation.
2. Acquisitions and Dispositions
During 2000, the Company acquired five companies with an aggregate purchase
price of approximately $3.4 million in cash, $0.7 million in notes, plus
additional payments over the next five years based on acquisition earnout
agreements. These payments will supplement the purchase price and be recorded
as additional goodwill. The most significant acquisition in 2000 was the
purchase of Boston Mortgage Capital Corporation (Boston Mortgage), through L.J.
Melody, for approximately $2.1 million, plus supplemental payments based on an
acquisition earnout agreement. Boston Mortgage provides further mortgage
banking penetration into the northeast. It services approximately $1.8 billion
in loans covering roughly 175 commercial properties throughout New England, New
York and New Jersey.
In February 2000, the Company sold certain non-strategic assets for cash
proceeds of $8.4 million, resulting in a pre-tax gain of $4.7 million.
During 1999, the Company acquired four companies with an aggregate purchase
price of approximately $13.8 million. The two significant acquisitions were
Eberhardt Company which was acquired in September 1999 through L.J. Melody for
approximately $7.0 million and Profi Nordic which was acquired in February 1999
through CBRE Profi Acquisition Corp. (formerly Koll Tender III) for
approximately $5.5 million.
During 1999, the Company sold five of its smaller non-strategic offices
(Bakersfield and Fresno, California; Albuquerque, New Mexico; Reno, Nevada; and
Salt Lake City, Utah) for a total of approximately $7.0 million received in
cash and notes. It also sold an insurance operation which was used to help
property management and other clients with complex insurance problems for $3.0
million in receivables. These sales resulted in a pre-tax gain of $8.7 million.
On October 20, 1998 the Company, through L.J. Melody, purchased Carey,
Brumbaugh, Starman, Phillips, and Associates, Inc., a regional mortgage banking
firm for approximately $5.6 million in cash and approximately $2.4 million in
notes bearing interest at 9.0% with three annual payments which began in
October 1999. Approximately $0.2 million of the $2.4 million notes was
accounted for as deferred cash compensation to select key executives. The
acquisition was accounted for as a purchase. The purchase price has
F-26
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
largely been allocated to intangibles and goodwill which are amortized on a
straight line basis over their estimated useful lives of 7 and 30 years,
respectively.
On October 1, 1998 the Company purchased the remaining ownership interests
that it did not already own in the Richard Ellis Australia and New Zealand
businesses. The costs for the remaining interest was $20.0 million in cash.
Virtually all of the revenue of these locations is derived from brokerage and
appraisal services. The acquisition was accounted for as a purchase. The
purchase price has largely been allocated to intangibles and goodwill which are
amortized on a straight line basis over their estimated useful lives ranging up
to 30 years.
On September 22, 1998 the Company purchased the approximately 73.0% interest
that it did not already own in CB Commercial Real Estate Group of Canada, Inc.
The Company acquired the remaining interest for approximately $14.3 million in
cash. The acquisition was accounted for as a purchase. The purchase price has
been largely allocated to intangibles and goodwill which are amortized on a
straight line basis over their estimated useful lives ranging up to 30 years.
On July 7, 1998 the Company acquired the business of Hillier Parker May and
Rowden, now known as CB Hillier Parker Limited (HP), a commercial property
services partnership operating in the United Kingdom (UK). The acquisition was
accounted for as a purchase. The purchase price for HP included approximately
$63.6 million in cash and $7.1 million in shares of the Company's common stock.
In addition, the Company assumed a contingent payout plan for key HP employees
with a potential payout over three years of approximately $13.9 million and
assumed various annuity obligations of approximately $15.0 million. The
purchase price has largely been allocated to goodwill which is amortized on a
straight line basis over its estimated useful life of 30 years.
On July 1, 1998 the Company increased its ownership percentage in CB
Commercial/Arnheim & Neely, an existing partnership formed in September 1996,
which then combined with the Galbreath Company Mid-Atlantic to form CB Richard
Ellis/Pittsburgh, LP. The total purchase price of the Company's 50% interest in
the combined enterprise is $5.7 million.
On May 31, 1998 the Company acquired Mathews Click and Associates, a
property sales, leasing, and management firm, for approximately $10.0 million
in cash and potential supplemental payments of $1.9 million which were
contingent upon operating results, payable to the sellers over a period of two
years. The acquisition was accounted for as a purchase. The total purchase
price including potential supplemental payments was allocated to intangibles
and goodwill which are amortized on a straight line basis over their estimated
useful lives of 7 and 30 years, respectively.
Effective May 1, 1998 the Company, through L.J. Melody, acquired Shoptaw-
James, Inc. (Shoptaw-James), a regional mortgage banking firm, for
approximately $6.3 million in cash and approximately $2.7 million in notes
bearing interest at 9.0% with three annual payments which began in May 1999.
The acquisition was accounted for as a purchase. Approximately $0.3 million of
the $2.7 million notes are being accounted for as compensation over the term of
the notes as the payment of these notes are contingent upon select key
executives' and producers' continued employment with the Company. Approximately
$2.4 million of the $2.7 million is being accounted for as supplemental
payments to the sellers over a period of three years. The purchase price and
supplemental payments have largely been allocated to intangibles and goodwill
which are amortized on a straight line basis over their estimated useful lives
of 7 and 30 years, respectively.
On April 17, 1998 the Company purchased all of the outstanding shares of CB
Commercial Limited, formerly known as REI Limited (REI), an international
commercial real estate services firm operating under the name Richard Ellis in
major commercial real estate markets worldwide (excluding the UK). The
acquisition
F-27
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
was accounted for as a purchase. The purchase price has largely been allocated
to goodwill, which is amortized on a straight line basis over an estimated
useful life of 30 years. The purchase price for REI was approximately $104.8
million of which approximately $53.3 million was paid in cash and notes and
approximately $51.5 million was paid in shares of the Company's common stock.
In addition, the Company assumed approximately $14.4 million of long-term debt
and minority interest. The Company incurred a one-time charge of $3.8 million
associated with the integration of REI's operations and systems into the
Company's.
On February 1, 1998 the Company, through L.J. Melody, acquired all of the
issued and outstanding stock of Cauble and Company of Carolina, a regional
mortgage banking firm for approximately $2.2 million, including cash payments
of approximately $1.8 million and a note payable of approximately $0.4 million
bearing interest at 9.0% with principal payments starting in April 1998. The
acquisition was accounted for as a purchase. The purchase price has been
largely allocated to intangibles and goodwill, which are amortized on a
straight line basis over their estimated useful lives of 7 and 30 years,
respectively.
On January 31, 1998 the Company, through L.J. Melody, acquired certain
assets of North Coast Mortgage Company, a regional mortgage banking firm for
cash payments of approximately $3.0 million and approximately $0.9 million in
notes. Approximately $0.3 million of the $0.9 million notes have been accounted
for as supplemental payments to the sellers and approximately $0.6 million as
deferred compensation to certain key executives and producers payable in three
annual installments which began in February 1999. The acquisition was accounted
for as a purchase. The purchase price and supplemental payments have largely
been allocated to intangibles and goodwill, which are amortized on a straight
line basis over their estimated useful lives of 7 and 30 years, respectively.
The $0.6 million of deferred cash compensation is being accounted for as
compensation over the term of the agreements as the payment of the compensation
is contingent upon select key executives' and producers' continued employment
with the Company.
The assets and liabilities of certain acquired companies, along with the
related goodwill, intangibles and indebtedness, are reflected in the
accompanying consolidated financial statements at December 31, 2000. The
results of operations of the acquired companies are included in the
consolidated results from the dates they were acquired. The unaudited pro forma
results of operations of the Company for the year ended December 31, 1998,
assuming the REI acquisition had occurred on January 1, 1998, would have been
as follows (amounts in thousands, except per share data):
Year Ended
December 31,
1998
------------
Revenue....................................................... $1,051,114
Net income.................................................... 15,586
Net loss applicable to common stockholders.................... (16,687)
Loss per share
Basic....................................................... (0.81)
Diluted..................................................... (0.81)
For the year ended December 31, 1998, net loss applicable to common
stockholders includes a deemed dividend of $32.3 million on the repurchase of
the Company's preferred stock. The pro forma results do not necessarily
represent results which would have occurred if the acquisitions had taken place
on the date assumed above, nor are they indicative of the results of future
combined operations. The amounts are based upon certain assumptions and
estimates, and do not reflect any benefit from economies which might be
achieved from combined operations. Further, REI historical results for the
first three months of 1998 include certain nonrecurring adjustments.
F-28
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment is stated at cost and consists of the following (in
thousands):
December 31
------------------
2000 1999
-------- --------
Buildings and improvements............................. $ 17,354 $ 19,273
Furniture and equipment................................ 128,678 111,840
Equipment under capital leases......................... 28,765 29,800
-------- --------
174,797 160,913
Accumulated depreciation and amortization.............. (98,805) (90,764)
-------- --------
Property and equipment, net............................ $ 75,992 $ 70,149
======== ========
The Company sold its headquarters building in downtown Los Angeles,
California, in September 1999 and a small office building in Phoenix, Arizona
in October 1999, both at a minimal loss. Depreciation expense was $19.2
million, $17.1 million and $14.8 million during 2000, 1999 and 1998,
respectively.
4. Investments in and Advances to Unconsolidated Subsidiaries
Investments in and advances to unconsolidated subsidiaries as of December
31, 2000 and 1999 are as follows (in thousands):
December 31
---------------
Interest 2000 1999
-------- ------- -------
CB Commercial/Whittier Partners, LP.............. 50.0% $10,173 $ 9,646
CBRE Pittsburgh.................................. 50.0% 6,261 5,853
Ikoma CB Richard Ellis K.K....................... 20.0% 3,695 2,523
Strategic Partners (CBRE Investors).............. 3.4% 3,659 --
Building Technology Engineers.................... 49.9% 2,595 --
CBRE Corp Partners, LLC.......................... 9.1% 2,510 1,453
Other............................................ * 12,432 19,039
------- -------
$41,325 $38,514
======= =======
- --------
* Various interests with varying ownership rates.
Unaudited combined condensed financial information for the entities
accounted for using the equity method is as follows (in thousands):
Consolidated Statement of Operations Information
Year Ended December 31
-------------------------
2000 1999 1998
-------- -------- -------
(Unaudited)
Net revenue..................................... $241,902 $172,365 $72,911
Income from operations.......................... 59,936 43,088 27,921
Net income...................................... 50,183 32,795 23,678
F-29
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Balance Sheet Information:
December 31
-----------------
2000 1999
-------- --------
(Unaudited)
Current assets.......................................... $153,942 $ 62,579
Noncurrent assets....................................... 777,718 689,286
Current liabilities..................................... 94,507 34,076
Noncurrent liabilities.................................. 302,530 249,546
Minority interest....................................... 519 1,115
5. Employee Benefit Plans
Option Plans. In conjunction with the North Coast Mortgage Company
acquisition, options for 25,000 shares were granted with an exercise price
representing the fair market value at date of grant of $32.50 per share. On
December 15, 1998, the option holders elected to change the exercise price to
$20.00 per share, which was above market value on the date of election, and
simultaneously reduce the number of shares by 20%. The options vest over five
years at a rate of 20% per year, expiring in February 2008. Options for
20,000 shares under the North Coast Mortgage Company acquisition were
outstanding at December 31, 2000.
In conjunction with the Shoptaw-James acquisition, options for 25,000 shares
were granted with an exercise price representing a fair market value of $37.32
per share on the date of grant. On December 15, 1998 the option holders elected
to change the exercise price to $20.00 per share, which was above market value
on the date of election, and simultaneously reduce the number of shares by 20%.
The options vest over five years at a rate of 20% per year, expiring in May
2008. Options for 20,000 shares under the Shoptaw-James acquisition were
outstanding at December 31, 2000.
In October 1998, in conjunction with the Carey, Brumbaugh acquisition,
options for 25,000 shares were granted with an exercise price representing a
fair market of $19.44 per share on the grant date. The options vest over five
years at a rate of 20% per year, expiring in September 2008. Options for 25,000
shares under the Carey, Brumbaugh acquisition were outstanding at December 31,
2000.
In April 1998, in conjunction with the REI acquisition, the Company approved
the assumption of the options outstanding under the REI Limited Stock Option
Plan. These options for 46,115 shares of common stock were issued and exercised
immediately at $14.95 per share in exchange for existing REI options. Also in
conjunction with the REI acquisition, the Company granted options for 475,677
shares at an exercise price equal to fair market value at date of grant of
$33.76 per share. On December 15, 1998 select holders of stock options elected
to change the exercise price of their options to $20.00 per share, which was
above market value on the date of election, and simultaneously reduce the
number of shares by 20%. During 2000, the Company granted options for 58,000
shares of common stock at an exercise price of $12.88 per share. All options
were granted at an exercise price equal to fair market value at date of grant.
The vesting periods of these options range from three to five years and they
expire at various dates through August 2010. Options for 492,984 shares were
outstanding under the REI Limited Stock Option Plan at December 31, 2000.
A total of 700,000 shares of common stock have been reserved for issuance
under the Company's 1997 Employee Stock Option Plan. On December 15, 1998,
select holders of stock options with an exercise price in excess of $20.00 per
share elected to change the exercise price of their options to $20.00 per
share, which was above market value on the date of election and simultaneously
reduce the number of shares by 20%. During 2000, the Company granted options
for 105,000 shares of common stock at exercise prices ranging from $10.38 to
$12.85 per share. All options were granted at an exercise price equal to fair
market value at date of grant.
F-30
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The vesting periods for these options range from approximately four to five
years and they expire at various dates through August 2010. Options for 692,060
shares were outstanding under the 1997 Employee Stock Option Plan at December
31, 2000.
In August 1997, in conjunction with the Koll acquisition, the Company
approved the assumption of the options outstanding under the KMS Holding
Company Amended 1994 Stock Option Plan (now known as the CBC Substitute Option
Plan (CBCSP)) and the Koll Acquisition Stock Option Plan (KASOP). Under the
CBCSP, 407,087 stock options were issued with exercise prices ranging from
$12.89 to $18.04 per share in exchange for existing Koll options. These options
were immediately exercisable and expire at various dates through April 2006.
All options were granted at an exercise price equal to fair market value at
date of grant. At December 31, 2000, 231,941 options were outstanding. Under
the KASOP, options for 550,000 shares were approved for issuance to former
senior executives of Koll who became employees or directors of the Company.
These options have exercise prices ranging from $14.25 to $36.75 per share and
vesting periods ranging from immediate to three years. During 2000, the Company
granted options for 20,000 shares of common stock under the KASOP at an
exercise price of $12.88 per share. These options expire at various dates
through August 2010. Options for 550,000 shares were outstanding for the KASOP
at December 31, 2000.
In August 1997, in conjunction with the Koll acquisition, the Company
approved the issuance of warrants to purchase 599,967 shares. Of the
outstanding warrants, 42,646 are attached to common stock obtainable under the
CBC Substitute Option Plan and 555,741 are attached to shares of outstanding
common stock. Each warrant is exercisable into one share of common stock at an
exercise price of $30.00 commencing in August 2000 and expiring in August 2004.
At December 31, 2000, 598,387 warrants issued were outstanding.
A total of 90,750 shares of common stock have been reserved for issuance
under the L.J. Melody Acquisition Stock Option Plan, which was adopted by the
Board of Directors in September 1996 as part of the July 1996 acquisition of
L.J. Melody. Options for all these shares have been issued at an exercise price
of $10.00 per share and vest over a period of five years at the rate of 5% per
quarter and these options expire in June 2006. Options for 90,750 shares of
common stock under the L.J. Melody Acquisition Stock Option Plan were
outstanding at December 31, 2000.
A total of 600,000 shares of common stock have been reserved for issuance
under the Company's 1991 Service Providers Stock Option Plan. In various years,
options were granted below market price to select directors as partial payment
for director fees. On December 15, 1998 select holders of stock options with an
exercise price in excess of $20.00 per share elected to change the exercise
price of their options to $20.00 per share, which was above market value on the
date of election and simultaneously reduce the number of shares by 20%. During
2000, options for 39,000 shares were granted to select directors and executive
officers at an exercise price equal to fair market value at date of grant
ranging from $11.81 to $12.88 per share. These options vest from a zero to a
five year period and expire at various dates through August 2010. Options for
583,888 shares were outstanding under the 1991 Service Providers Stock Option
Plan at December 31, 2000.
A total of 1,000,000 shares of common stock have been reserved for issuance
under the Company's 1990 Stock Option Plan. All options vest over a four year
period, expiring at various dates through November 2006. Options for 35,000
shares under the 1990 Stock Option Plan were outstanding at December 31, 2000.
The Company completed the 1999 stock repurchase program on January 5, 2000.
A total of 397,450 shares of common stock were purchased for a total of $5.0
million. In 1998, a total of 488,900 shares of common stock were purchased for
$8.8 million. The shares purchased in 1999 and 1998 will be used to minimize
the dilution caused by the exercise of stock options and the grant of stock
purchase rights.
F-31
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's option plans at December 31, 2000,
1999 and 1998 and changes during the years then ended is presented in the table
and narrative below:
2000 1999 1998
------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Stock Options and Exercise Exercise Exercise
Warrants Shares Price Shares Price Shares Price
- ----------------- --------- -------- --------- -------- ---------- --------
Outstanding beginning of
the year............... 3,075,356 $20.71 2,937,085 $23.18 3,284,381 $22.43
Granted................. 487,710 24.81 628,611 15.17 1,885,944 25.94
Exercised............... -- -- (58,000) 10.00 (824,385) 10.73
Forfeited/Expired....... (223,056) 19.84 (432,340) 31.64 (1,408,855) 32.42
--------- ------ --------- ------ ---------- ------
Outstanding end of
year................... 3,340,010 $21.25 3,075,356 20.71 2,937,085 $23.18
--------- ------ --------- ------ ---------- ------
Exercisable at end of
year................... 1,824,665 $23.90 770,756 $21.86 830,289 $21.94
Weighted average fair
value of options
granted during the
year................... $ 6.72 $ 8.84 $12.27
Significant option and warrant groups outstanding at December 31, 2000 and
related weighted average price and life information is presented below:
Exercisable Options
Outstanding Options and Warrants and Warrants
------------------------------------- --------------------
Weighted Weighted
Weighted Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
------------------------ ----------- ---------------- -------- ----------- --------
$00.38-$10.38.......... 167,594 5.32 yrs. $ 7.44 143,519 $ 6.97
$11.81-$19.44.......... 985,941 7.69 yrs. 14.48 327,141 14.48
$20.00-$23.75.......... 1,273,754 6.84 yrs. 20.52 488,218 20.79
$30.00-$36.75.......... 912,721 4.64 yrs. 32.11 865,787 32.02
--------- ------ --------- ------
3,340,010 $21.25 1,824,665 $23.90
========= ====== ========= ======
Deferred Compensation Plan (the DCP). In 1994, the Company implemented the
DCP. Under the DCP, a select group of management and highly compensated
employees can defer the payment of all or a portion of their compensation
(including any bonus). The DCP permits participating employees to make an
irrevocable election at the beginning of each year to receive amounts deferred
at a future date either in cash, which is an unsecured long-term liability of
the Company, or in shares of common stock of the Company which elections are
recorded as additions to stockholders' equity. In May 2000, the Company began
repurchasing stock from the open market in order to minimize the dilutive
effect of issuing stock pursuant to the DCP. As of December 31, 2000, the
Company has repurchased 185,800 shares of common stock for $2.0 million, which
is reported as an increase in treasury stock. In 1999, the Company revised the
DCP to add insurance products which function like mutual funds as an investment
alternative and to fund the Company's obligation for deferrals invested in
these insurance products. Prior to July 1, 2000, cash payments to purchase
additional insurance products were made on the third business day of the month
following the related DCP participant deferral. Currently, payments are made
twice a month. For the year ended December 31, 2000, $43.6 million was deferred
and mainly allocated to the other investment products. The accumulated non-
stock liability at December 31, 2000 was $80.5 million and the assets (in the
form of insurance proceeds) set aside to cover the liability was $53.2 million.
The total liability of $92.0 million, including $11.5 million deferred in
stock, was charged to expense in the period of deferral and classified as
deferred compensation plan liability, except for
F-32
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock which is included in stockholders' equity. On July 17, 2000, the Company
announced a match of the stock portion of the DCP for the Plan Year 1999 in the
amount of $4.5 million, equivalent to 437,880 shares of common stock at a
market price of $10.38 per share. The vesting period is over five years with
20% vesting each year at December 31, 2000 through 2004. The related
compensation expense will be amortized over the vesting period. The Company
charged to compensation expense a total of $0.9 million for the year ended
December 31, 2000. The weighted average fair value of the shares granted during
the year is $5.90. In October 2000, the Company added the "Retention Program"
and the "Recruitment Program" to the DCP, with the awards being effective
January 2001. Under the Retention Program, the 125 best sales professionals
were credited with 5,700, 4,500 or 3,000 stock units under the DCP (each unit
is the equivalent of one share of stock). The stock units do not vest for four
years and in the case of those sales professionals who were credited with 5,700
or 4,500 stock units, there was a requirement to execute a long-term covenant
not to compete. Under the Recruitment Program, the Company credited either
stock units or cash to experienced new hires for sales professional jobs. The
share awards ranged from 750 to 4,500 and the cash awards ranged from
$30 thousand to $100 thousand.
As allowed under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company has elected to follow Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its employee stock based compensation plans.
Under this method the Company does not recognize compensation expense for
options that were granted at or above the market price of the underlying stock
on the date of grant. Had compensation expense been determined consistent with
SFAS No. 123, the Company's net income and per share information would have
been reduced to the following pro forma amounts (in thousands except per share
data):
2000 1999 1998
------- ------- -------
Net Income:
As Reported....................................... $33,388 $23,282 $24,557
Pro Forma......................................... 30,393 19,039 20,396
Basic EPS:
As Reported....................................... 1.60 1.11 (0.38)
Pro Forma......................................... 1.45 0.91 (0.59)
Diluted EPS:
As Reported....................................... 1.58 1.10 (0.38)
Pro Forma......................................... 1.44 0.91 (0.59)
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant and DCP company match is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants:
2000 1999 1998
---------- ---------- ----------
Risk free interest rate..................... 6.52% 5.55% 4.95%
Expected volatility......................... 58.06% 61.83% 48.16%
Expected life............................... 5.00 years 5.00 years 5.00 years
Dividend yield is excluded from the calculation since it is the present
intention of the Company to retain all earnings.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models
F-33
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's 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, the Company believes the Black-Scholes model does not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Stock Purchase Plans. The Company has restricted stock purchase plans
covering select key executives including senior management. A total of 500,000
and 550,000 shares of common stock have been reserved for issuance under the
Company's 1999 and 1996 Equity Incentive Plans, respectively. The shares may be
issued to senior executives for a purchase price equal to the greater of $18.00
and $10.00 per share or fair market value, respectively. Under the 1999 and
1996 Equity Incentive Plans, the Company issued 285,000 and 50,000 shares in
2000, and 415,833 and 441,937 shares were outstanding at December 31, 2000,
respectively. The purchase price for these shares must be paid either in cash
or by delivery of a full recourse promissory note. The related promissory notes
are also included in the Consolidated Statements of Stockholders' Equity.
In October 1998, the Company offered all employees under the 1990 Stock
Option Plan who held options that expired in April 1999 a loan equal to 100% of
the total exercise price plus 40% of the difference between the current market
value of the shares and the exercise price. Loan proceeds were applied towards
the total exercise price and payroll withholding taxes. The loans are evidenced
by full recourse promissory notes having a maturity of five years at an
interest rate of 6.0%. Interest is due annually, while the principal is due the
earlier of five years or upon sale of the shares. The shares issued under this
offering may not be sold until after 18 months from the date of issuance. A
total of 415,000 shares were issued under this offering. The related promissory
notes of $4.7 million and $4.9 million are included in other assets in the
Consolidated Balance Sheets at December 31, 2000 and 1999, respectively.
Bonuses. The Company has bonus programs covering select key employees,
including senior management. Awards are based on the position and performance
of the employee and the achievement of pre-established financial, operating and
strategic objectives. The amounts charged to expense for bonuses were $49.8
million, $44.3 million and $33.7 million for the years ended December 31, 2000,
1999, and 1998, respectively.
Capital Accumulation Plan (the Cap Plan). The Cap Plan is a defined
contribution profit sharing plan under Section 401(k) of the Internal Revenue
Code and is the Company's only such plan. Under the Cap Plan, each
participating employee may elect to defer a portion of his or her earnings and
the Company may make additional contributions from the Company's current or
accumulated net profits to the Cap Plan in these amounts as determined by the
Board of Directors. The Company expensed, in connection with the Cap Plan, $2.2
million and $1.6 million for the years ended December 31, 2000 and 1999. No
expense, in connection with the Cap Plan, was incurred for the year ended
December 31, 1998.
Employee Stock Purchase Plan. In May 2000, the Company amended and restated,
effective July 1, 2000, its 1998 employee stock purchase plan designed
exclusively for employees who earn less than $100,000 in total annual
compensation. Under the plan, the eligible employees may purchase common stock
by means of contributions to the Company at a price equal to 90% of the fair
market value of the share on the last trading day of the purchase period. The
plan provides for purchases by employees up to an aggregate of 150,000 shares
each year for 2000, 2001 and 2002. This program was discontinued effective
October 2000.
Pension Plan. The Company, through the acquisition of Hillier Parker,
maintains a contributory defined benefit pension plan to provide retirement
benefits to existing and former Hillier Parker employees participating in the
plan. It is the Company's policy to fund the minimum annual contributions
required by applicable regulations. Pension expense totaled $0.9 million, $1.9
million and $0.9 million in 2000, 1999 and 1998, respectively.
F-34
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth a reconciliation of benefit obligation, plan
assets, plan's funded status and amounts recognized in the accompanying
Consolidated Balance Sheets:
Year Ended
December 31
------------------
2000 1999
-------- --------
(in thousands)
Change in benefit obligation
Benefit obligation at beginning of year................. $ 72,146 $ 73,190
Service cost............................................ 5,728 5,350
Interest cost........................................... 4,026 4,175
Plan participants' contributions........................ 671 804
Actuarial gain.......................................... (4,680) (7,495)
Benefits paid........................................... (1,343) (1,760)
Currency gain........................................... (5,472) (2,118)
-------- --------
Benefit obligation at end of year....................... $ 71,076 $ 72,146
======== ========
Change in plan assets
Fair value of plan assets at beginning of year.......... $115,039 $ 95,731
Actual return on plan assets............................ (3,340) 22,666
Company contributions................................... 1,257 786
Plan participants' contributions........................ 671 419
Benefits paid........................................... (1,343) (1,760)
Currency loss........................................... (8,596) (2,803)
-------- --------
Fair value of plan assets at end of year................ $103,688 $115,039
======== ========
Funded status........................................... $ 32,612 $ 42,893
Unrecognized net actuarial gain......................... (7,941) (16,570)
Company contributions in the post-measurement period.... 564 --
-------- --------
Prepaid benefit cost.................................... $ 25,235 $ 26,323
======== ========
Weighted-average assumptions used in developing the projected benefit
obligation were as follows:
December 31
----------------
2000 1999
------- -------
Discount rate.............................................. 6.00% 5.75%
Expected return on plan assets............................. 7.75% 7.75%
Rate of compensation increase.............................. 5.00% 5.00%
Net periodic pension cost consisted of the following:
Year Ended
December 31
----------------
2000 1999
------- -------
(in thousands)
Employer service cost...................................... $ 5,728 $ 5,350
Interest cost on projected benefit obligation.............. 4,026 4,175
Expected return on plan assets............................. (8,395) (7,636)
Unrecognized net gain...................................... (425) --
------- -------
Net periodic benefit cost.................................. $ 934 $ 1,889
======= =======
F-35
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-term Debt
Long-term debt consists of the following (in thousands):
December 31
-----------------
2000 1999
-------- --------
Senior Subordinated Notes, less unamortized discount of
$1.7 million and $1.9 million at December 31, 2000 and
1999, respectively, with fixed interest at 8.9% due in
2006.................................................... $173,336 $173,108
Revolving Credit Facility, with interest ranging from
8.5% to 9.0%, due in 2003............................... 110,000 160,000
Westmark Senior Notes, with interest ranging from 9.0% to
10.0% through December 31, 2004 and at variable rates
depending on the Company's credit facility rate
thereafter, due from 2001 through 2010.................. 15,502 16,502
Euro cash pool loan, with interest at 6.91% and no stated
maturity date........................................... 6,946 --
REI Senior Notes, with variable interest rates based on
Sterling LIBOR minus 1.5%, due in 2002.................. 2,742 2,965
Shoptaw-James Senior Notes, with fixed interest at 9.0%,
due in 2001............................................. 810 1,620
Carey, Brumbaugh Senior Notes, with fixed interest at
9.0%, due in 2001....................................... 720 1,440
Eberhardt Acquisition Obligations, with fixed interest at
8.0%, due from 2001 through 2002........................ 600 900
Capital lease obligations, mainly for autos and telephone
equipment, with interest ranging from 6.8% to 8.9%, due
through 2004............................................ 2,302 3,554
Other.................................................... 1,206 4,548
-------- --------
Total.................................................... 314,164 364,637
Less current maturities.................................. 10,593 6,765
-------- --------
Total long-term debt................................... $303,571 $357,872
======== ========
Annual aggregate maturities of long-term debt at December 31, 2000 are as
follows (in thousands): 2001--$10,593; 2002--$4,536; 2003--$110,512; 2004--
$128; 2005--$20; and $188,375 thereafter.
In October 1999, the Company executed an amendment to the revolving credit
facility, eliminating the mandatory reduction on December 31, 1999, and
revising some of the restrictive covenants. The new amendment is also subject
to mandatory reductions of the facility by $80.0 million and $70.0 million on
December 31, 2000 and 2001, respectively. This reduced the facility from $350.0
million to $270.0 million at December 31, 2000. The amount outstanding under
this facility was $110.0 million at December 31, 2000. Interest rate
alternatives include Bank of America's reference rate plus 1.00% and LIBOR plus
2.00%. The weighted average rate on amounts outstanding at December 31, 2000
was 8.79%.
The revolving credit facility contains numerous restrictive covenants that,
among other things, limit the Company's ability to incur or repay other
indebtedness, make advances or loans to subsidiaries and other entities, make
capital expenditures, incur liens, enter into mergers or effect other
fundamental corporate transactions, sell its assets, or declare dividends. In
addition, the Company is required to meet certain ratios relating to its
adjusted net worth, level of indebtedness, fixed charges and interest coverage.
The Company has outstanding Senior Subordinated Notes (Subordinated Notes)
due on June 1, 2006. The Subordinated Notes are redeemable in whole or in part
after June 1, 2002 at 104.438% of par on that date and at declining prices
thereafter. On or before June 1, 2001, up to 35.0% of the issued amount may be
redeemed at 108.875% of par plus accrued interest solely with the proceeds from
an equity offering.
F-36
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has a credit agreement with Residential Funding Corporation
(RFC). The credit agreement provides for a revolving line of credit, which
bears interest at 1.25% per annum over LIBOR. On July 19, 2000, the Company
executed an amendment to the revolving line of credit, increasing the line of
credit from $50.0 million to $100.0 million, decreasing the interest rate from
1.25% to 1.00% per annum over LIBOR and extending the expiration date from
August 31, 2000 to August 31, 2001. In addition, on November 8, 2000, the
Company obtained a temporary line of credit increase of $52.0 million,
resulting in a total line of credit equaling $152.0 million. This temporary
line of credit increase expired on November 30, 2000. During the year, the
Company had a maximum of $151.3 million revolving line of credit principal
outstanding. At December 31, 2000, the Company had $0.4 million revolving line
of credit principal outstanding.
7. Commitments and Contingencies
In December 1996, GMH Associates, Inc. (GMH) filed a lawsuit against
Prudential Realty Group (Prudential) and the Company in the Superior Court of
Pennsylvania, Franklin County, alleging various contractual and tort claims
against Prudential, the seller of a large office complex, and the Company, its
agent in the sale, contending that Prudential breached its agreement to sell
the property to GMH, breached its duty to negotiate in good faith, conspired
with the Company to conceal from GMH that Prudential was negotiating to sell
the property to another purchaser and that Prudential and the Company
misrepresented that there were no other negotiations for the sale of the
property. Following a non-jury trial, the court rendered a decision in favor of
GMH and against Prudential and the Company, awarding GMH $20.3 million in
compensatory damages, against Prudential and the Company jointly and severally,
and $10.0 million in punitive damages, allocating the punitive damage award
$7.0 million as against Prudential and $3.0 million as against the Company.
Following the denial of motions by Prudential and the Company for a new trial,
a judgment was entered on December 3, 1998. Prudential and the Company filed an
appeal of the judgment. On March 3, 2000, the appellate court in Pennsylvania
reversed all of the trial courts' decisions finding that liability was not
supported on any theory claimed by GMH and directed that a judgment be entered
in favor of the defendants including the Company. The plaintiff filed an appeal
with the Pennsylvania Supreme Court which was denied. The plaintiff has
exhausted all appeal possibilities and judgment is expected to be entered
shortly in favor of all defendants.
In August 1993, a former commissioned sales person of the Company filed a
lawsuit against the Company in the Superior Court of New Jersey, Bergen County,
alleging gender discrimination and wrongful termination by the Company. On
November 20, 1996, a jury returned a verdict against the Company, awarding $1.5
million in general damages and $5.0 million in punitive damages to the
plaintiff. Subsequently, the trial court awarded the plaintiff $0.6 million in
attorneys' fees and costs. Following denial by the trial court of the Company's
motions for new trial, reversal of the verdict and reduction of damages, the
Company filed an appeal of the verdict and requested a reduction of damages. On
March 9, 1999, the appellate court ruled in the Company's favor, reversed the
trial court decision and ordered a new trial. On February 16, 2000, the Supreme
Court of New Jersey reversed the decision of the appellate court, concluded
that the general damage award in the trial court should be sustained and
returned the case to the appellate court for a determination as to whether a
new trial should be ordered on the issue of punitive damages. In April 2000,
the Company settled the compensatory damages claim (including interest) and all
claims to date with respect to attorneys fees by paying to the plaintiff the
sum of $2.75 million leaving only the punitive damage claim for resolution (the
plaintiff also agreed, with very limited exceptions, that no matter what the
outcome of the punitive damage claim the Company would not be responsible for
more than 50% of the plaintiff's future attorney fees). In February 2001, the
Company settled all remaining claims for the sum of $2.0 million and received a
comprehensive release.
The Company is a party to a number of pending or threatened lawsuits arising
out of, or incident to, its ordinary course of business. Based on available
cash and anticipated cash flows, the Company believes that the ultimate outcome
will not have an impact on the Company's ability to carry on its operations.
Management
F-37
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
believes that any liability to the Company that may result from disposition of
these lawsuits will not have a material effect on the consolidated financial
position or results of operations of the Company.
The following is a schedule by years of future minimum lease payments for
noncancelable leases as of December 31, 2000 (in thousands):
Capital Operating
Leases Leases
------- ---------
2001....................................................... $1,167 $ 48,299
2002....................................................... 895 40,686
2003....................................................... 518 33,316
2004....................................................... 10 25,967
2005....................................................... -- 22,195
Thereafter................................................. -- 97,674
------ --------
Total minimum payments required.......................... $2,590 $268,137
====== ========
The interest portion of capital lease payments represents the amount
necessary to reduce net minimum lease payments to present value calculated at
the Company's incremental borrowing rate at the inception of the leases. This
totaled $0.3 million at December 31, 2000, resulting in a present value of net
minimum lease payments of $2.3 million. At December 31, 2000, $0.9 million and
$1.4 million are included in the current portion of long-term debt and long-
term debt, respectively. In addition, the total minimum payments for
noncancelable operating leases have not been reduced by the minimum sublease
rental income of $42.9 million due in the future under noncancelable subleases.
Substantially all leases require the Company to pay maintenance costs,
insurance and property taxes, and generally may be renewed for five year
periods. The composition of total rental expense under noncancelable operating
leases consisted of the following (in thousands):
December 31,
-------------------------
2000 1999 1998
------- ------- -------
Minimum rentals................................... $56,243 $51,467 $33,126
Less sublease rentals............................. (1,387) (928) (706)
------- ------- -------
$54,856 $50,539 $32,420
======= ======= =======
In 1999, the Company entered into an agreement with Fannie Mae in which the
Company agreed to fund the purchase of a $103.6 million loan portfolio from
proceeds from its RFC line of credit, which was temporarily increased to $140.0
million in 2000. In December 2000, the Company entered into an agreement with
Fannie Mae in which the Company agreed to fund the purchase of an additional
$7.5 million loan from proceeds from its RFC line of credit. A 100%
participation in both the original and additional loan portfolio was
subsequently sold to Fannie Mae with the Company retaining the credit risk on
the first 2% of loss incurred on the underlying commercial mortgage loans. The
Company has collateralized a portion of its obligation to cover the first 2% of
losses for both the $103.6 million loan portfolio and the additional
$7.5 million loan portfolio by increasing a letter of credit in favor of Fannie
Mae to total $1.1 million.
The Company has a participation agreement with RFC whereby RFC agrees to
purchase a 99% participation interest in any eligible multifamily mortgage
loans owned by the Company and outstanding at quarter-end. This participation
agreement, which originally expired on August 31, 2000, has been extended to
August 31, 2001.
F-38
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An important part of the strategy for the Company's investment management
business involves investing the Company's own capital in certain real estate
investments with its clients. As of December 31, 2000, the Company had
committed an additional $37.7 million to fund future co-investments.
8. Income Taxes
The tax provision (benefit) for the years ended December 31, 2000, 1999 and
1998 consisted of the following (in thousands):
Year Ended December 31
-------------------------
2000 1999 1998
------- ------- -------
Federal:
Current......................................... $24,924 $14,403 $ 4,265
Deferred tax.................................... 921 (1,417) 14,469
Reduction of valuation allowances............... (3,000) (6,347) --
------- ------- -------
22,845 6,639 18,734
State:
Current......................................... 6,895 5,627 3,470
Deferred tax.................................... (1,243) (1,411) (75)
------- ------- -------
5,652 4,216 3,395
Foreign:
Current......................................... 7,015 8,837 3,797
Deferred tax.................................... (761) (3,513) --
------- ------- -------
6,254 5,324 3,797
------- ------- -------
$34,751 $16,179 $25,926
======= ======= =======
The following is a reconciliation, stated as a percentage of pre-tax income,
of the US statutory federal income tax rate to the Company's effective tax rate
on income from operations:
Year Ended December 31
---------------------------
2000 1999 1998
------- ------- -------
Federal statutory tax rate.................. 35% 35% 35%
Permanent differences, including goodwill,
meals, entertainment and other............. 11 15 8
State taxes, net of federal benefit......... 6 9 4
Foreign income taxes........................ 4 4 4
Reduction of valuation allowances........... (5) (22) --
------- ------- -------
Effective tax rate.......................... 51% 41% 51%
======= ======= =======
The domestic component of income before provision for income tax included in
the consolidated statement of operations was $63.2 million, $32.0 million and
$45.6 million, for 2000, 1999 and 1998, respectively. The international
component of income before provision for income tax was $4.9 million, $7.4
million and $4.9 million, for 2000, 1999 and 1998, respectively.
F-39
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cumulative tax effects of temporary differences are shown below at December
31, 2000 and 1999 (in thousands):
December 31
------------------
2000 1999
-------- --------
Asset (Liability)
Property and equipment................................. $ 11,910 $ 5,820
Bad debts and other reserves........................... 12,832 15,940
Intangible amortization................................ (15,736) (16,533)
Bonus, unexercised restricted stock, deferred
compensation.......................................... 35,343 23,990
Partnership income..................................... 6,950 7,092
Net operating loss (NOL) and alternative minimum tax
credit carryforwards.................................. 6,134 23,086
Unconsolidated affiliates.............................. 1,010 (1,167)
All other, net......................................... 1,853 2,040
-------- --------
Net deferred tax asset before valuation allowances..... 60,296 60,268
Valuation allowances................................... (16,830) (20,320)
-------- --------
Net deferred tax asset............................... $ 43,466 $ 39,948
======== ========
The Company had federal income tax NOLs of approximately $16.3 million at
December 31, 2000, corresponding to $5.7 million of the Company's $60.3 million
in net deferred tax assets before valuation allowances.
The ability of the Company to utilize NOLs was limited in 1998 and will be
in subsequent years as a result of the Company's 1996 public offering, the 1997
Koll acquisition and the 1998 repurchase of preferred stock which cumulatively
caused a more than 50.0% change of ownership within a three year period. As a
result of the limitation, the Company's ability to utilize its existing NOLs is
limited to $26.0 million on an annual basis. It is anticipated that the Company
will utilize the remaining NOLs in 2001.
A deferred US tax liability has not been provided on the unremitted earnings
of foreign subsidiaries because it is the intent of the Company to permanently
reinvest these earnings. Undistributed earnings of foreign subsidiaries, which
have been or are intended to be permanently invested in accordance with APB
No. 23, Accounting for Income Taxes--Special Areas, aggregated $27.7 million at
December 31, 2000.
9. Earnings Per Share Information
Basic earnings (loss) per share was computed by dividing net income (loss),
less preferred dividend requirements as applicable, by the weighted average
number of common shares outstanding during each period. The computation of
diluted earnings (loss) per share further assumes the dilutive effect of stock
options, stock warrants and other stock-based compensation programs, as well as
the conversion of the preferred stock during periods when preferred stock was
outstanding and was dilutive.
In January 1998, the Company repurchased all 4.0 million shares of its
outstanding convertible preferred stock. The portion of the purchase price in
excess of the carrying value represents the deemed dividend charge to net
income applicable to common shareholders when computing basic and diluted
earnings (loss) per share for the year ended December 31, 1998.
F-40
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a calculation of earnings (loss) per share for the years
ended December 31 (in thousands, except share and per share data):
2000 1999 1998
------------------------- ------------------------- ---------------------------
Per- Per- Per-
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
------- ---------- ------ ------- ---------- ------ -------- ---------- ------
Basic earnings (loss)
per share:
Net income............. $33,388 $23,282 $ 24,557
Deemed dividend on
preferred stock
repurchase............ -- -- (32,273)
------- ---------- ----- ------- ---------- ----- -------- ---------- ------
Net income (loss)
applicable to common
stockholders.......... $33,388 20,931,111 $1.60 $23,282 20,998,097 $1.11 $ (7,716) 20,136,117 $(0.38)
======= ========== ===== ======= ========== ===== ======== ========== ======
Diluted earnings (loss)
per share:
Net income (loss)
applicable to common
stockholders.......... $33,388 20,931,111 $23,282 20,998,097 $ (7,716) 20,136,117
Diluted effect of
exercise of options
outstanding........... 35,594 74,339 --
Diluted effect of
stock-based
compensation
programs.............. 130,535 -- --
------- ---------- ------- ---------- -------- ----------
Net income (loss)
applicable to common
stockholders.......... $33,388 21,097,240 $1.58 $23,282 21,072,436 $1.10 $ (7,716) 20,136,117 $(0.38)
======= ========== ===== ======= ========== ===== ======== ========== ======
The following items were not included in the computation of diluted earnings
per share because their effect in the aggregate was anti-dilutive for the years
ended December 31,
2000 1999 1998
-------------- -------------- ---------------
Stock options
Outstanding.................. 2,574,029 2,008,659 2,337,118
Price ranges................. $11.81-$36.75 $16.38-$36.75 $0.30-$37.31
Expiration ranges............ 6/8/04-8/31/10 6/8/04-5/31/09 4/18/99-7/22/08
Stock warrants
Outstanding.................. 598,387 599,967 599,967
Price........................ $30.00 $30.00 $30.00
Expiration date.............. 8/28/04 8/28/04 8/28/04
10. Disclosures About Fair Value of Financial Instruments
Long-term Debt. Based on dealer's quote, the estimated fair value of the
Company's $173.3 million Senior Subordinated Note, discussed in Note 6, is
$155.8 million.
Estimated fair values for the Revolving Credit Facilities and the remaining
long-term debts are not presented because the Company believes that it is not
materially different from book value, primarily because the majority of the
Company's debt is based on variable rates.
F-41
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Industry Segments
In July 1999, the Company undertook a reorganization to streamline its US
operations which resulted in a change in its segment reporting from four to
three segments. The Company has a number of lines of business which are
aggregated, reported and managed through these three segments: Transaction
Management, Financial Services and Management Services. The Transaction
Management segment is our largest generator of revenue and operating income and
includes Brokerage Services, Corporate Services and Investment Property
activities. Brokerage Services includes activities that provide sales, leasing
and consulting services in connection with commercial real estate and is the
Company's primary revenue source. Corporate Services focuses on building
relationships with large corporate clients which generate recurring revenue.
Investment Property activities provide brokerage services for commercial real
property marketed for sale to institutional and private investors. The
Financial Services segment provides commercial mortgage, valuation, investment
management and consulting and research services. The Management Services
segment provides facility management services to corporate real estate users
and property management and related services to owners. The following table
summarizes the revenue, cost and expenses, and operating income (loss) by
operating segment for the year ended December 31, 2000, 1999 and 1998 (in
thousands):
Year Ended December 31
--------------------------------
2000 1999 1998
---------- ---------- ----------
Revenue:
Transaction Management
Leases.................................... $ 510,287 $ 426,108 $ 352,811
Sales..................................... 378,486 383,726 330,206
Other consulting and referral fees(1)..... 61,479 71,095 79,934
---------- ---------- ----------
Total revenue........................... 950,252 880,929 762,951
Financial Services
Appraisal fees............................ 72,861 69,007 48,090
Loan origination and servicing fees....... 58,188 45,938 39,402
Investment management fees................ 40,433 27,323 32,591
Other(1).................................. 42,622 35,059 25,167
---------- ---------- ----------
Total revenue........................... 214,104 177,327 145,250
Management Services
Property management fees.................. 83,251 79,994 67,300
Facilities management fees................ 23,069 25,597 17,219
Other(1).................................. 52,928 49,192 41,783
---------- ---------- ----------
Total revenue........................... 159,248 154,783 126,302
---------- ---------- ----------
Consolidated revenues....................... $1,323,604 $1,213,039 $1,034,503
========== ========== ==========
Operating income (loss)
Transaction Management...................... $ 83,305 $ 68,382 $ 81,232
Financial Services.......................... 17,712 7,113 6,849
Management Services......................... 6,268 1,404 6,980
Merger-related and other nonrecurring
charges.................................... -- -- (16,585)
---------- ---------- ----------
107,285 76,899 78,476
Interest income............................. 2,554 1,930 3,054
Interest expense............................ 41,700 39,368 31,047
---------- ---------- ----------
Income before provision for income taxes.... $ 68,139 $ 39,461 $ 50,483
========== ========== ==========
F-42
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31
-----------------------
2000 1999 1998
------- ------- -------
Depreciation and amortization
Transaction Management................................. $21,342 $20,676 $13,722
Financial Services..................................... 12,001 10,719 11,025
Management Services.................................... 9,856 9,075 7,438
------- ------- -------
$43,199 $40,470 $32,185
======= ======= =======
Year Ended December 31
-----------------------
2000 1999 1998
------- ------- -------
Capital expenditures
Transaction Management................................ $15,435 $15,830 $12,669
Financial Services.................................... 6,674 11,030 10,179
Management Services................................... 4,812 8,270 6,867
------- ------- -------
$26,921 $35,130 $29,715
======= ======= =======
Equity interest in earnings of unconsolidated subsidi-
aries
Transaction Management................................ $ 3,930 $ 2,542 $ 315
Financial Services.................................... 1,162 4,030 706
Management Services................................... 2,020 956 2,422
------- ------- -------
$ 7,112 $ 7,528 $ 3,443
======= ======= =======
- --------
(1) Revenue is allocated by material line of business specific to each segment.
"Other" includes types of revenue that have not been broken out separately
due to their immaterial balances and/or nonrecurring nature within each
segment. Certain revenue types disclosed on the consolidated statements of
operations may not be derived directly from amounts shown in this table.
December 31
-----------------
2000 1999
-------- --------
Identifiable assets
Transaction Management.................................. $477,268 $444,422
Financial Services...................................... 261,682 246,151
Management Services..................................... 159,835 171,118
Corporate............................................... 64,320 67,792
-------- --------
$963,105 $929,483
======== ========
Identifiable assets by industry segment are those assets used in the Company
operations in each segment. Corporate identified assets are principally made up
of cash and cash equivalents and deferred taxes.
December 31
-----------------
2000 1999
-------- --------
Investment in and advances to unconsolidated subsidiaries
Transaction Management.................................. $ 14,208 $ 11,352
Financial Services...................................... 15,199 18,587
Management Services..................................... 11,918 8,575
-------- --------
$41,325 $ 38,514
======== ========
F-43
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographic Information:
Year Ended December 31
--------------------------------
2000 1999 1998
---------- ---------- ----------
Revenue
Americas
United States.......................... $1,027,359 $ 940,341 $ 884,304
Canada, South and Central America...... 46,721 42,112 16,473
---------- ---------- ----------
1,074,080 982,453 900,777
Asia Pacific............................. 84,985 79,420 46,528
Europe, Middle East and Africa........... 164,539 151,166 87,198
---------- ---------- ----------
$1,323,604 $1,213,039 $1,034,503
========== ========== ==========
December 31
---------------
2000 1999
------- -------
Long-Lived assets
United States.............................................. $55,100 $51,064
All other countries........................................ 20,892 19,085
------- -------
$75,992 $70,149
======= =======
Long lived assets include property, plant and equipment.
12. Subsequent Event
On February 24, 2001, the Company announced that it had entered into a
merger agreement providing for the acquisition of the Company by Blum CB
Corporation (Blum CB) for $16.00 per share in cash. Blum CB is an affiliate of
Blum Capital Partners, Freeman Spogli & Co. and certain directors and executive
officers of the Company.
The agreement provides that the Company employees will have the option to
roll over their existing shares in the Company's deferred compensation plan and
a portion of the Company shares held in their 401(k) accounts. Employees will
also be provided the opportunity to make a direct equity investment in the
surviving company.
The acquisition, which is expected to close early in the third quarter,
remains subject to certain conditions, including the receipt of Blum CB's debt
financing, the approval of the merger by the holders of two-thirds of the
outstanding shares of the Company not owned by the buying group, the expiration
or termination of waiting periods under applicable antitrust laws and a
successful tender offer for at least 51% of the Company's outstanding 8 7/8%
Senior Subordinated Notes. The Company will pay a termination fee of
$7.5 million and reimburse up to $3.0 million of the buying group's expenses if
the Company wishes to accept a superior acquisition proposal.
F-44
CB RICHARD ELLIS SERVICES, INC.
QUARTERLY RESULTS OF OPERATIONS AND OTHER FINANCIAL DATA
(Unaudited)
The following table sets forth the Company's unaudited quarterly results of
operations. The unaudited quarterly information should be read in conjunction
with the audited consolidated financial statements of the Company and the notes
thereto. The operating results for any quarter are not necessarily indicative
of the results for any future period.
2000 1999
---------------------------------------------- ----------------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Results of Operation:
Revenue................. $ 418,280 $ 326,521 $ 317,884 $ 260,919 $ 395,653 $ 307,018 $ 277,167 $ 233,201
Operating income........ $ 50,617 $ 24,884 $ 22,545 $ 9,239 $ 35,197 $ 20,046 $ 16,580 $ 5,076
Interest expense, net... $ 9,018 $ 10,039 $ 10,893 $ 9,196 $ 9,629 $ 9,503 $ 9,667 $ 8,639
Net income (loss)....... $ 20,914 $ 6,977 $ 5,477 $ 20 $ 17,031 $ 4,648 $ 3,356 $ (1,753)
Basic EPS(1)............ $ 0.99 $ 0.34 $ 0.26 $ -- $ 0.81 $ 0.22 $ 0.16 $ (0.08)
Weighted average shares
outstanding for basic
EPS(1)................. 21,217,685 20,086,651 20,879,218 20,819,268 20,928,615 21,098,757 21,032,324 20,640,438
Diluted EPS(1).......... $ 0.97 $ 0.33 $ 0.26 $ -- $ 0.81 $ 0.22 $ 0.16 $ (0.08)
Weighted average shares
outstanding for diluted
EPS(1)................. 21,554,942 20,881,092 20,906,117 20,851,184 20,964,066 21,162,334 21,125,074 20,640,438
Other Financial Data:
EBITDA, excluding
merger-related and
other nonrecurring
charges................ $ 61,682 $ 35,718 $ 33,276 $ 19,808 $ 45,704 $ 30,047 $ 26,548 $ 15,070
Net cash provided by
(used in) operating
activities............. $ 86,601 $ 48,528 $ 16,505 $ (67,522) $ 71,174 $ 47,062 $ 10,122 $ (54,347)
Net cash (used in)
provided by investing
activities............. $ (7,350) $ (16,255) $ (18,431) $ 6,314 $ (5,417) $ (6,863) $ (16,327) $ 1,840
Net cash (used in)
provided by financing
activities............. $ (80,037) $ (28,824) $ (3,456) $ 58,794 $ (62,330) $ (27,820) $ 2,389 $ 50,040
Balance Sheet Data:
Cash and cash
equivalents............ $ 20,854 $ 20,724 $ 19,195 $ 24,791 $ 27,844 $ 25,122 $ 12,553 $ 17,425
Total assets............ $ 963,105 $ 930,029 $ 904,925 $ 897,756 $ 929,483 $ 871,159 $ 841,311 $ 824,757
Total long-term debt.... $ 303,571 $ 390,624 $ 418,231 $ 416,531 $ 357,872 $ 413,227 $ 435,419 $ 431,135
Total liabilities....... $ 724,018 $ 717,618 $ 693,416 $ 687,765 $ 715,874 $ 670,685 $ 648,801 $ 634,707
Total stockholders
equity................. $ 235,339 $ 209,569 $ 208,276 $ 206,711 $ 209,737 $ 196,324 $ 187,819 $ 185,259
Number of shares
outstanding............ 20,605,023 20,246,122 20,270,560 20,408,692 20,435,692 20,686,995 20,794,165 20,640,865
Ratios:
Debt/equity............. 1.33 1.88 2.03 2.04 1.74 2.13 2.35 2.37
EBITDA, excluding
merger-related and
other nonrecurring
charges net interest
expense................ 6.84 3.56 3.05 2.15 4.75 3.16 2.75 1.74
EBITDA, excluding
merger-related and
other nonrecurring
charges as a percentage
of revenue............. 14.7% 10.9% 10.5% 7.6% 11.6% 9.8% 9.6% 6.5 %
Net income as a
percentage of revenue.. 5.0% 2.1% 1.7% -- 4.3% 1.5% 1.2% (0.8)%
International revenue as
a percentage of
consolidated revenue... 21.6% 21.8% 22.7% 23.9% 22.5% 22.5% 22.3% 22.6 %
- --------
(1) EPS is defined as earnings (loss) per share
F-45
CB RICHARD ELLIS SERVICES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Above
Market Lease Allowance for Other
Reserve Bad Debts Legal Reserve Reserves
------------ ------------- ------------- --------
Balance, December 31, 1997... $ -- $ 8,980 $ 9,807 $ 9,108
CB Canada balances at the
date of acquisition....... -- 606 -- --
REI balances at the date of
acquisition............... -- 2,211 -- 256
Hillier Parker balances at
the date of acquisition... 13,360 895 72 421
Charges to expense......... -- 2,978 1,843 364
Write-offs, payments and
other..................... (54) (2,322) (1,623) (6,004)
------- ------- ------- -------
Balance, December 31, 1998... 13,306 13,348 10,099 4,145
Charges to expense......... -- 2,560 2,164 26
Write-offs, payments and
other..................... (384) (348) (4,000) (2,526)
------- ------- ------- -------
Balance, December 31, 1999... 12,922 15,560 8,263 1,645
Charges to expense......... -- 3,061 2,015 49
Write-offs, payments and
other..................... (1,568) (5,990) (5,139) (291)
------- ------- ------- -------
Balance, December 31, 2000... $11,354 $12,631 $ 5,139 $ 1,403
======= ======= ======= =======
F-46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,236,639 Shares of Class A Common Stock
1,820,397 Options to Acquire Class A Common Stock
CBRE Holding, Inc.
----------------
[LOGO OF CB RICHARD ELLIS]
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table indicates the expenses to be incurred in connection with
the offering described in this registration statement, all of which will be
paid by CBRE Holding, Inc. All amounts are estimates other than the
registration fee.
SEC registration fee............................................. $ 20,235
Accounting fees and expenses..................................... 500,000
Legal fees and expenses.......................................... 1,000,000
Printing and engraving expenses.................................. 500,000
Transfer agent fees and expenses................................. 10,000
Blue sky fees and expenses....................................... 7,000
Miscellaneous fees and expenses.................................. 62,765
----------
Total.......................................................... $2,100,000
==========
Item 14. Indemnification of Directors and Officers.
Section 102 of the Delaware General Corporation Law, or the DGCL, as
amended, allows a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for monetary damages
for a breach of fiduciary duty as a director, except where the director
breached his duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or knowingly violated a law, authorized the payment of a
dividend or approved a stock repurchase in violation of Delaware corporate law
or obtained an improper personal benefit.
Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of CBRE Holding) by reason of the fact that the
person is or was a director, officer, agent or employee of CBRE Holding or is
or was serving at our request as a director, officer, agent, or employee of
another corporation, partnership, joint venture, trust or other enterprise
against expenses, including attorneys' fees, judgment, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
the action, suit or proceeding. The power to indemnify applies (a) if the
person is successful on the merits or otherwise in defense of any action, suit
or proceeding or (b) if the person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of CBRE Holding, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
power to indemnify applies to actions brought by or in the right of
CBRE Holding as well, but only to the extent of defense expenses (including
attorneys' fees but excluding amounts paid in settlement) actually and
reasonably incurred and not to any satisfaction of judgment or settlement of
the claim itself, and with the further limitation that in these actions no
indemnification shall be made in the event of any adjudication of negligence or
misconduct in the performance of his duties to CBRE Holding, unless the court
believes that in light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for these actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her dissent to
these actions to be entered in the books containing the minutes of the meetings
of the board of directors at the time the action occurred or immediately after
the absent director receives notice of the unlawful acts.
II-1
Our restated certificate of incorporation includes a provision that limits
the personal liability of our directors for monetary damages for breach of
fiduciary duty as a director, except to the extent such limitation is not
permitted under the Delaware General Corporation Law.
Our restated certificate of incorporation provides that:
. we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
. we must indemnify our other employees and agents to the same extent that
we indemnified our directors and officers unless otherwise determined by
our board of directors; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware Law.
The indemnification provisions contained in our certificate of incorporation
and bylaws are not exclusive of any other rights to which a person may be
entitled by law, agreement, vote of stockholders or disinterested directors or
otherwise. In addition, we maintain insurance on behalf of our directors and
executive officers insuring them against any liability asserted against them in
their capacities as directors or officers or arising out of this status.
Item 15. Recent Sales of Unregistered Securities.
Since inception, we have issued or will issue unregistered securities
without registration under the Securities Act of 1933, as amended as follows:
On February 22, 2001, we sold and issued 10 shares of our Class B common
stock to RCBA Strategic Partners, L.P. for an aggregate cash consideration of
$160.00. RCBA Strategic Partners will sign the securityholders' agreement
described in the prospectus that is included in this registration statement,
and these shares will become subject to the terms of such agreement, only upon
completion of the merger.
On June 7, 2001, we sold and issued 241,875 shares of our Class B common
stock to RCBA Strategic Partners, L.P. for an aggregate cash consideration of
$3,870,000. These shares were purchased in connection with the closing of the
sale of 11 1/4% senior subordinated notes by BLUM CB Corp. The proceeds from
the sale of those shares to RCBA Strategic were contributed to BLUM CB Corp.,
which deposited the proceeds in an escrow account for release when the merger
between BLUM CB Corp. and CB Richard Ellis Services is completed.
Immediately prior to the merger, the members of the buying group will
contribute 8,052,087 shares of CB Richard Ellis Services' common stock to us.
Each of the shares of CB Richard Ellis Services' common stock that the members
of the buying group contribute to us will be cancelled as a result of the
merger. As a result of the contributions of CB Richard Ellis Services' common
stock, we will issue an aggregate of 8,052,087 shares of our Class B common
stock to the members of the buying group.
Also pursuant to the contribution and voting agreement, immediately prior to
the merger, the BLUM Funds have agreed to purchase for cash a minimum of
2,553,879 shares of our Class B common stock at $16.00 per share. In addition,
the BLUM Funds have agreed to purchase for cash an additional number of shares
of our Class B common stock for $16.00 per share equal to (1) 3,236,639 shares
minus (2) the number of shares of our Class A common stock and stock fund units
subscribed for in the offering made by this prospectus plus (3) the aggregate
amount of full-recourse notes delivered by designated managers in the offerings
divided by $16.00. The number of shares purchased by the BLUM Funds will be
reduced by 241,885 shares, as a result of the prior purchases on February 22,
2001 and June 7, 2001 by RCBA Strategic as described above. After the offerings
are completed depending on the amount to which the offerings are fully
subscribed, the shares of our Class A and Class B common stock owned by the
buying group will be equal to between approximately 80% and 96% of our
outstanding Class A and Class B common stock, taken together.
II-2
Upon consummation of the merger, the warrants to acquire 364,884 shares of
CB Richard Ellis Services common stock owned by FSEP Equity Partners III, L.P.
and FSEP International will be cancelled and we will issue new warrants to each
of them to purchase up to an aggregate number of shares of our Class B common
stock equal to the number that represents the same percentage of the total
outstanding shares of our common stock immediately after consummation of the
merger as the warrants to acquire 364,884 shares of CB Richard Ellis Services
common stock entitled Freeman Spogli to acquire immediately prior to the
consummation of the merger. At any time on or after August 26, 2007, Freeman
Spogli may exercise some or all of these warrants. In addition, upon a
qualifying underwritten initial public offering, a change of control or merger,
in each case as defined in the warrant agreement, these warrants will convert
automatically.
The sales of the above securities will be deemed to be exempt from
registration in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated under the Securities Act. These sales will be made
without general solicitation or advertising. The recipients in each such
transaction will represent their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends will be affixed to the share
certificates and warrants issued in such transactions. All recipients will have
adequate access, through their relationship with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit Description
------- -----------
2.1* Amended and Restated Agreement and Plan of Merger dated as of May 31,
2001 by and among CB Richard Ellis Services, Inc., CBRE Holding, Inc.
(the "Company" and formerly BLUM CB Holding Corp.), and BLUM CB Corp.
3.1(a) Certificate of Incorporation of the Company
3.1(b) Amendment to the Certificate of Incorporation of the Company, dated
as of March 26, 2001
3.1(c) Amendment to the Certificate of Incorporation of the Company, dated
as of June 1, 2001
3.2 Restated Certificate of Incorporation of the Company
3.3 Bylaws of the Company
3.4 Restated Bylaws of the Company
4.1 Specimen Class A Common Stock Certificate
4.2(a)* Amended and Restated Contribution and Voting Agreement dated as of
May 31, 2001 by and among the Company, BLUM CB Corp., RCBA Strategic
Partners, L.P., FS Equity Partners III, L.P., FS Equity Partners
International, L.P., The Koll Holding Company, Donald Koll, Frederic
V. Malek, Raymond E. Wirta and Brett White
4.2(b) Form of Securityholders' Agreement (Exhibit A to the Contribution and
Voting Agreement set forth in Exhibit 4.2(a) hereto)
4.2(c)* Form of Warrant Agreement (Exhibit B to the Contribution and Voting
Agreement set forth in Exhibit 4.2(a) hereto)
4.3 Form of Designated Manager Subscription Agreement
4.4 Form of Employee Subscription Agreement
4.5 Purchase Agreement between the Company and Credit Suisse First Boston
Corporation dated as of June 29, 2001
4.6 Form of Pledge Agreement
4.7 Indenture between CB Commercial Real Estate Services Group, Inc. and
State Street Bank and Trust Company of California, N.A., as Trustee,
dated as of May 26, 1998 for 8 7/8% Senior Subordinated Notes due
2008
II-3
Exhibit Description
------- -----------
4.8 First Supplemental Indenture between CB Richard Ellis Services, Inc.
and State Street Bank and Trust Company of California, N.A., as
Trustee, dated as of May 26, 1998 for 8 7/8% Senior Subordinated
Notes due 2008
4.9 Purchase Agreement, dated as of May 31, 2001, among the Company, BLUM
CB Corp. and Credit Suisse First Boston Corporation
4.10 Indenture, dated as of June 7, 2001, among the Company, BLUM CB Corp.
and State Street Bank and Trust Company of California, N.A., as
Trustee, for 11 1/4% Senior Subordinated Notes due 2011
4.11 Registration Rights Agreement, dated as of May 31, 2001, among the
Company, BLUM CB Corp. and Credit Suisse First Boston Corporation
5.1 Form of Opinion of Simpson Thacher & Bartlett
5.2 Form of Opinion of O'Melveny & Myers LLP
10.1 CBRE Holding, Inc. 2001 Stock Incentive Plan
10.2 Form of Full-Recourse Note
10.3 Form of Stock Option Agreement
10.4* CB Richard Ellis Services, Inc. Amended and Restated Deferred
Compensation Plan
10.5* CB Richard Ellis Services, Inc. Deferred Compensation Plan Election
Form
10.6* CB Richard Ellis Services, Inc. Amended and Restated 401(k) Plan
10.7* CB Richard Ellis Services, Inc. 401(k) Plan Instruction Form
10.8* Raymond Wirta Employment Agreement
10.9* Brett White Employment Agreement
10.10 Employment Agreement dated as of May 23, 1997 between the Company and
James J. Didion
10.11(a) CSFB Commitment Letter, dated as of February 23, 2001 by and between
Credit Suisse First Boston and the Company
10.11(b) Amendment to the CSFB Commitment Letter dated as of May 31, 2001 by
and between Credit Suisse First Boston and the Company
10.12(a) DLJ Commitment Letter, dated as of February 23, 2001 by and between
DLJ Investment Funding, Inc. and the Company
10.12(b) Amendment to the DLJ Commitment Letter dated as of May 31, 2001 by
and between DLJ Investment Funding, Inc. and the Company
10.12(c) Amendment to the DLJ Commitment Letter dated as of June 29, 2001 by
and between DLJ Investment Funding, Inc. and the Company
12.1* Computation of Ratio of Earnings to Fixed Charges and Preferred
Dividends
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1)
23.3 Consent of O'Melveny & Myers LLP (included in Exhibit 5.2)
- --------
* Previously filed.
** To be filed by amendment.
(b) Schedules
i) Schedule II--Valuation and Qualifying Accounts
ii) Report of Independent Accountants on Financial Statement Schedule
II-4
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification by the registrant against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by itself is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on July 5, 2001.
CBRE Holding, Inc.
/s/ Claus Moller
By: _________________________________
Claus Moller
President and Sole Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on July 5, 2001 by the following persons
in the capacities indicated.
Name Title
---- -----
/s/ Claus Moller President and Sole Director
___________________________________________ (Principal Executive Officer)
Claus Moller
/s/ Christian Puscasiu Treasurer (Principal Financial
___________________________________________ Officer)
Christian Puscasiu
II-6
EXHIBIT INDEX
Exhibit Description
------- -----------
3.1(a) Certificate of Incorporation of the Company
3.1(b) Amendment to the Certificate of Incorporation of the Company, dated
as of March 26, 2001
3.1(c) Amendment to the Certificate of Incorporation of the Company, dated
as of June 1, 2001
3.2 Restated Certificate of Incorporation of the Company
3.3 Bylaws of the Company
3.4 Restated Bylaws of the Company
4.1 Specimen Class A Common Stock Certificate
4.2(b) Form of Securityholders' Agreement
4.3 Form of Designated Manager Subscription Agreement
4.4 Form of Employee Subscription Agreement
4.5 Purchase Agreement between the Company and Credit Suisse First Boston
Corporation dated as of June 29, 2001
4.6 Form of Pledge Agreement
4.7 Indenture between CB Commercial Real Estate Services Group, Inc. and
State Street Bank and Trust Company of California, N.A., as Trustee,
dated as of May 26, 1998 for 8 7/8% Senior Subordinated Notes due
2008
4.8 First Supplemental Indenture between CB Richard Ellis Services, Inc.
and State Street Bank and Trust Company of California, N.A., as
Trustee, dated as of May 26, 1998 for 8 7/8% Senior Subordinated
Notes due 2008
4.9 Purchase Agreement, dated as of May 31, 2001, among the Company, BLUM
CB Corp. and Credit Suisse First Boston Corporation
4.10 Indenture, dated as of June 7, 2001, among the Company, BLUM CB Corp.
and State Street Bank and Trust Company of California, N.A., as
Trustee, for 11 1/4% Senior Subordinated Notes due 2011
4.11 Registration Rights Agreement, dated as of May 31, 2001, among the
Company, BLUM CB Corp. and Credit Suisse First Boston Corporation
5.1 Form of Opinion of Simpson Thacher & Bartlett
5.2 Form of Opinion of O'Melveny & Myers LLP
10.1 CBRE Holding, Inc. 2001 Stock Incentive Plan
10.2 Form of Full-Recourse Note
10.3 Form of Stock Option Agreement
10.10 Employment Agreement dated as of May 23, 1997 between the Company and
James J. Didion
10.11(a) CSFB Commitment Letter, dated as of February 23, 2001 by and between
Credit Suisse First Boston and the Company
10.11(b) Amendment to the CSFB Commitment Letter dated as of May 31, 2001 by
and between Credit Suisse First Boston and the Company
10.12(a) DLJ Commitment Letter, dated as of February 23, 2001 by and between
DLJ Investment Funding, Inc. and the Company
10.12(b) Amendment to the DLJ Commitment Letter dated as of May 31, 2001 by
and between DLJ Investment Funding, Inc. and the Company
10.12(c) Amendment to the DLJ Commitment Letter dated as of June 29, 2001 by
and between DLJ Investment Funding, Inc. and the Company
Exhibit Description
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21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1)
23.3 Consent of O'Melveny & Myers LLP (included in Exhibit 5.2)