SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 20, 2001
CBRE HOLDING, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 000-32983 94-3391143
- --------------- ------------------------ -------------------
(State or Other (Commission File Number) (IRS Employer
Jurisdiction of Identification No.)
Incorporation)
200 North Sepulveda Boulevard, El Segundo, California 90245
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(Address of Principal Executive Offices) (Zip Code)
(310) 563-8600
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Registrant's Telephone Number, Including Area Code
NA
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(Former Name or Former Address, if Changed Since Last Report)
This Current Report on Form 8-K (this "Form 8-K") is filed by CBRE Holding,
Inc. (the "Company"), a Delaware corporation, in connection with the matters
described herein.
Item 2. Acquisition or Disposition of Assets.
On July 20, 2001, pursuant to an Amended and Restated Agreement and
Plan of Merger dated as of May 31, 2001 (the "Merger Agreement"), among CB
Richard Ellis Services, Inc. (the "Services"), the Company and BLUM CB Corp., a
Delaware corporation and a wholly-owned subsidiary of the Company
("Acquisition"), Acquisition was merged with and into Services (the "Merger").
Services was the surviving corporation in the Merger and at the effective time
of the Merger became a wholly-owned subsidiary of the Company. Pursuant to the
terms of the Merger Agreement, at the effective time of the Merger each issued
and outstanding share of Common Stock, par value $.01 per share (the "Common
Stock"), of Services was converted into the right to receive $16.00 in cash,
other than (i) shares of Common Stock owned by the Company and Acquisition,
which totaled 7,967,274 shares at such time, which were cancelled, (ii) treasury
shares and shares of Common Stock owned by any of Services' subsidiaries, which
were cancelled, and (iii) shares held by stockholders who perfect appraisal
rights for such shares in accordance with Delaware law. Following the Merger,
the Common Stock was delisted from the New York Stock Exchange.
Pursuant to an Amended and Restated Contribution and Voting Agreement,
dated as of May 31, 2001 and as amended on July 19, 2001 (the "Contribution
Agreement"), among (i) RCBA Strategic Partners, L.P., a Delaware limited
partnership ("Strategic"), FS Equity Partners III, L.P., a Delaware limited
partnership ("FSEP III"), FS Equity Partners International, L.P., a Delaware
limited partnership ("FSEP International"), The Koll Holding Company, a
California corporation ("Koll Holding"), Frederic V. Malek, a former director of
Services ("Malek"), Raymond E. Wirta, the Chief Executive Officer and a director
of Services ("Wirta"), and W. Brett White, the Chairman of the Americas and a
director of Services ("White") (collectively, the "Continuing Stockholders");
(ii) the Company; and (iii) Acquisition, among other things, immediately prior
to the effective time of the Merger, the Continuing Stockholders and their
affiliates contributed 7,967,274 shares of Common Stock to the Company (the
"Share Contribution") in consideration for the issuance to them of an equal
number of shares of Class B Common Stock, par value $.01 per share, of the
Company (the "Class B Common Stock"). Such shares of Common Stock contributed
to the Company were cancelled at the effective time of the Merger. Also
pursuant to the Contribution Agreement, Strategic contributed $25,522,992.00 to
the Company and the Company issued 1,595,187 shares of Class B Common Stock to
Strategic and Blum Strategic Partners II, L.P. ("Blum") contributed
$45,439,472.00 to the Company and the Company issued 2,839,967 shares of Class B
Common Stock to Blum (the foregoing, collectively, the "Cash Contribution," and
together with the Share Contribution, the "Contributions").
In connection with the completion of the Merger, a Securityholders'
Agreement, dated as of July 20, 2001 (the "Securityholders' Agreement"), was
entered into among Strategic, Blum, FSEP III, FSEP International, Koll Holding,
California Public Employees' Retirement System ("CalPERS"), Malek, DLJ
Investment Funding, Inc., Credit Suisse First Boston Corporation, Wirta, White,
Services and the Company, which sets forth certain agreements among the parties
thereto with respect to the Company's Class A Common Stock and Class B
Common Stock. Immediately prior to the Merger and the related transactions, the
Company was wholly-owned and controlled by Strategic. As a result of the
provisions set forth in the Securityholders' Agreement, after the Merger, the
Company remains controlled by Strategic and its affiliates, which have the right
to designate a majority of the Company's directors.
The funding to complete the Merger, as well as the refinancing of
substantially all of the outstanding indebtedness of Services, was obtained
through (i) the Contributions, (ii) the offering by the Company of shares of its
Class A Common Stock, par value $.01 per share, of the Company (the "Class A
Common Stock") to employees of Services, (iii) the sale of 625,000 shares of
Class A Common Stock to CalPERS for $16.00 per share, (iv) the issuance and sale
by the Company of units for $65 million, which units consist in the aggregate of
$65 million aggregate principal amount of 16% Senior Notes due 2001 and 339,820
shares of Class A Common Stock, (v) the issuance and sale by Acquisition of $229
million aggregate principal amount of 11 1/4% Senior Subordinated Notes due 2011
for $225.6 million (which Senior Subordinated Notes were assumed by Services in
connection with the Merger) and (vi) borrowings by Services under a new credit
agreement with Credit Suisse First Boston and other lenders of approximately
$285 million.
The Merger Agreement is hereby incorporated herein by reference to
Exhibit 2.1, the Contribution Agreement, as amended, is hereby incorporated
herein by reference to Exhibits 2.2 and 2.3, the Securityholders' Agreement is
hereby incorporated herein by reference to Exhibit 99.1 and Services' press
release announcing the effectiveness of the Merger is incorporated herein by
reference to Exhibit 99.2. The foregoing descriptions of such documents are
qualified in their entirety by reference to such exhibits.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
Audited financial statements for Services as of December 31, 2000 and
1999 and for the years ended December 31, 2000, 1999 and 1998 are set forth
below. Unaudited financial statements for Services as of March 31, 2001 and for
the three months ended March 31, 2001 and 2000 are also set forth below.
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.
4
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.
5
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.
6
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
7
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.
8
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.
9
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.
10
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
======== ========
11
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
12
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.
13
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.
14
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.
15
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.
16
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.
17
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
18
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.
19
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
20
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
21
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
22
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.
23
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
24
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.
25
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.
26
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
27
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
28
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.
29
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
======= =======
30
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.
31
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
32
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.
33
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.
34
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.
35
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.
36
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
========== ========== ==========
37
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
======== ========
38
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.
39
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
40
(b) Pro Forma Financial Information.
The pro forma financial information required by Item 7(b) is not
included in this filing. The Company intends to file such information as an
amendment to this Form 8-K not later than October 2, 2001.
(c) Exhibits.
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.,
and BLUM CB Corp. (incorporated by reference from Exhibit 2.1 of
Amendment No. 1 to the Registration Statement on Form S-1, filed by
CBRE Holding, Inc. on June 12, 2001, File No. 333-59440).
2.2 Amended and Restated Contribution and Voting Agreement, dated as of
May 31, 2001, by and among CBRE Holding, Inc., BLUM CB Corp., RCBA
Strategic Partners, L.P., FS Equity Partners III, L.P., FS Equity
Partners International, L.P., Raymond E. Wirta, W. Brett White,
Frederic V. Malek and The Koll Holding Company (incorporated by
reference from Exhibit 4.2(a) of Amendment No. 1 to Form S-1, filed by
CBRE Holding, Inc. on June 12, 2001, File No. 333-59440).
2.3 Amendment, dated as of July 19, 2001, to the Amended and Restated
Contribution and Voting Agreement, by and among CBRE Holding, Inc.,
BLUM CB Corp., RCBA Strategic Partners, L.P., FS Equity Partners III,
L.P., FS Equity Partners International, L.P., Raymond E. Wirta, W.
Brett White, Frederic V. Malek and The Koll Holding Company
(incorporated by reference from Exhibit 23 of Amendment No. 9 to the
Schedule 13D, filed by RCBA GP, L.L.C., RCBA Strategic Partners, L.P.,
Richard C. Blum & Associates, Inc., BLUM Capital Partners, L.P.,
Richard C. Blum and CBRE Holding, Inc. on July 25, 2001, File No. 005-
46943).
99.1 Securityholders' Agreement, dated as of July 20, 2001, by and among
RCBA Strategic Partners, L.P., Blum Strategic Partners II, L.P., FS
Equity Partners III, L.P., FS Equity Partners International, L.P., The
Koll Holding Company, California Public Employees' Retirement System,
Frederic V. Malek, DLJ Investment Funding, Inc., Credit Suisse Boston
Corporation, Raymond E. Wirta, W. Brett White, CB Richard Ellis
Services, Inc. and CBRE Holding, Inc. (incorporated by reference from
Exhibit 25 of Amendment No. 9 to the Schedule 13D, filed by RCBA GP,
L.L.C., RCBA Strategic Partners, L.P., Richard C. Blum & Associates,
Inc., BLUM Capital Partners, L.P., Richard C. Blum and CBRE Holding,
Inc. on July 25, 2001, File No. 005-46943).
99.2 Press Release of CB Richard Ellis Services, Inc. (filed herewith).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 3, 2001 CBRE HOLDING, INC.
By: /s/ Walter V. Stafford
----------------------
Walter V. Stafford
Secretary
Index to Exhibits
Exhibit No. Title
- ---------- -----
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., and BLUM CB Corp. (incorporated by reference from
Exhibit 2.1 of Amendment No. 1 to the Registration Statement on
Form S-1, filed by CBRE Holding, Inc. on June 12, 2001, File No.
333-59440).
2.2 Amended and Restated Contribution and Voting Agreement, dated as
of May 31, 2001, by and among CBRE Holding, Inc., BLUM CB Corp.,
RCBA Strategic Partners, L.P., FS Equity Partners III, L.P., FS
Equity Partners International, L.P., Raymond E. Wirta, W. Brett
White, Frederic V. Malek and The Koll Holding Company
(incorporated by reference from Exhibit 4.2(a) of Amendment No. 1
to Form S-1, filed by CBRE Holding, Inc. on June 12, 2001, File
No. 333-59440).
2.3 Amendment, dated as of July 19, 2001, to the Amended and Restated
Contribution and Voting Agreement, by and among CBRE Holding,
Inc., BLUM CB Corp., RCBA Strategic Partners, L.P., FS Equity
Partners III, L.P., FS Equity Partners International, L.P.,
Raymond E. Wirta, W. Brett White, Frederic V. Malek and The Koll
Holding Company (incorporated by reference from Exhibit 23 of
Amendment No. 9 to the Schedule 13D, filed by RCBA GP, L.L.C.,
RCBA Strategic Partners, L.P., Richard C. Blum & Associates,
Inc., BLUM Capital Partners, L.P., Richard C. Blum and CBRE
Holding, Inc. on July 25, 2001, File No. 005-46943).
99.1 Securityholders' Agreement, dated as of July 20, 2001, by and
among RCBA Strategic Partners, L.P., Blum Strategic Partners II,
L.P., FS Equity Partners III, L.P., FS Equity Partners
International, L.P., The Koll Holding Company, California Public
Employees' Retirement System, Frederic V. Malek, DLJ Investment
Funding, Inc., Credit Suisse Boston Corporation, Raymond E.
Wirta, W. Brett White, CB Richard Ellis Services, Inc. and CBRE
Holding, Inc. (incorporated by reference from Exhibit 25 of
Amendment No. 9 to the Schedule 13D, filed by RCBA GP, L.L.C.,
RCBA Strategic Partners, L.P., Richard C. Blum & Associates,
Inc., BLUM Capital Partners, L.P., Richard C. Blum and CBRE
Holding, Inc. on July 25, 2001, File No. 005-46943).
99.2 Press Release of CB Richard Ellis Services, Inc. (filed
herewith).