UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2003

 

 

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

 

 

For the Transition Period from                    to                   

 

Commission File Number 000 - 32983

 

 

CBRE HOLDING, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

94-3391143

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

865 South Figueroa Street, Suite 3400
Los Angeles, California

 

90017

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(213) 613-3226

 

355 South Grand Avenue, Suite 3100
Los Angeles, CA 90071

(Registrant’s telephone number,
including area code)

 

(Former name, former address and former fiscal year
if changed since last report)

 

 

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

 

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

 

                             The number of shares of Class A and Class B common stock outstanding at July 31, 2003 was 2,567,814 and 19,271,948, respectively.

 

 

 



 

CBRE HOLDING, INC.

 

FORM 10-Q

 

June 30, 2003

 

TABLE OF CONTENTS

 

 

 

 

PAGE

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets at June 30, 2003 (Unaudited) and December 31, 2002

3

 

Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002 (Unaudited)

4

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (Unaudited)

5

 

Notes to Consolidated Financial Statements (Unaudited)

6

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Disclosure Controls and Procedures

30

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

31

Item 6.

Exhibits and Reports on Form 8-K

31

Signature

32

 

 

2



 

CBRE HOLDING, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

June 30, 2003
(Unaudited)

 

December 31, 2002

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

23,018

 

$

79,701

 

Receivables, less allowance for doubtful accounts of $11,478 and $10,892 at June 30, 2003 and December 31, 2002, respectively

 

154,224

 

166,213

 

Warehouse receivable

 

138,240

 

63,140

 

Prepaid expenses

 

19,623

 

9,748

 

Deferred tax assets, net

 

19,758

 

18,723

 

Other current assets

 

14,143

 

8,415

 

Total current assets

 

369,006

 

345,940

 

Property and equipment, net

 

68,959

 

66,634

 

Goodwill

 

577,137

 

577,137

 

Other intangible assets, net of accumulated amortization of $10,193 and $7,739 at June 30, 2003 and December 31, 2002, respectively

 

89,494

 

91,082

 

Deferred compensation assets

 

69,533

 

63,642

 

Investments in and advances to unconsolidated subsidiaries

 

57,691

 

50,208

 

Deferred tax assets, net

 

35,972

 

36,376

 

Cash held in escrow

 

200,000

 

 

Other assets

 

94,109

 

93,857

 

Total assets

 

$

1,561,901

 

$

1,324,876

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

98,096

 

$

102,415

 

Compensation and employee benefits payable

 

61,491

 

63,734

 

Accrued bonus and profit sharing

 

49,853

 

103,858

 

Income taxes payable

 

 

15,451

 

Short-term borrowings:

 

 

 

 

 

Warehouse line of credit

 

138,240

 

63,140

 

Revolver and swingline credit facility.

 

11,250

 

 

Other

 

56,149

 

47,925

 

Total short-term borrowings

 

205,639

 

111,065

 

Current maturities of long-term debt

 

10,760

 

10,711

 

Total current liabilities

 

425,839

 

407,234

 

Long-Term Debt:

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount of $2,945 and $3,057 at June 30, 2003 and December 31, 2002, respectively

 

226,055

 

225,943

 

Senior secured term loans

 

206,013

 

211,000

 

9¾% senior notes

 

200,000

 

 

16% senior notes, net of unamortized discount of $4,971 and $5,107 at June 30, 2003 and December 31, 2002, respectively

 

63,344

 

61,863

 

Other long-term debt

 

12,320

 

12,327

 

Total long-term debt

 

707,732

 

511,133

 

Deferred compensation liability

 

112,741

 

106,252

 

Other liabilities

 

56,836

 

43,301

 

Total liabilities

 

1,303,148

 

1,067,920

 

Minority interest

 

6,081

 

5,615

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Class A common stock; $0.01 par value; 75,000,000 shares authorized; 1,835,123 and 1,793,254 shares issued and outstanding (including treasury shares) at June 30, 2003 and December 31, 2002, respectively

 

18

 

17

 

Class B common stock; $0.01 par value; 25,000,000 shares authorized; 12,624,813 shares issued and outstanding at June 30, 2003 and December 31, 2002

 

127

 

127

 

Additional paid-in capital

 

241,475

 

240,574

 

Notes receivable from sale of stock

 

(4,762

)

(4,800

)

Accumulated earnings

 

39,978

 

36,153

 

Accumulated other comprehensive loss

 

(22,272

)

(18,998

)

Treasury stock at cost, 120,174 and 110,174 shares at June 30, 2003 and December 31, 2002, respectively

 

(1,892

)

(1,732

)

Total stockholders’ equity

 

252,672

 

251,341

 

Total liabilities and stockholders’ equity

 

$

1,561,901

 

$

1,324,876

 

 

 

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

 

3



 

CBRE HOLDING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

321,717

 

$

284,893

 

$

585,441

 

$

508,883

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

153,066

 

128,782

 

276,665

 

227,836

 

Operating, administrative and other

 

137,421

 

124,353

 

263,596

 

240,206

 

Depreciation and amortization

 

6,329

 

4,111

 

12,500

 

11,703

 

Equity income from unconsolidated subsidiaries

 

(3,801

)

(1,639

)

(6,864

)

(3,644

)

Merger-related charges

 

3,310

 

23

 

3,310

 

605

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

25,392

 

29,263

 

36,234

 

32,177

 

Interest income

 

701

 

534

 

1,776

 

1,398

 

Interest expense

 

16,940

 

14,904

 

31,264

 

30,921

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income tax

 

9,153

 

14,893

 

6,746

 

2,654

 

Provision for income tax

 

3,981

 

7,604

 

2,921

 

1,460

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,172

 

$

7,289

 

$

3,825

 

$

1,194

 

 

 

 

 

 

 

 

 

 

 

Basic income per share

 

$

0.34

 

$

0.48

 

$

0.25

 

$

0.08

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for basic income per share

 

15,040,868

 

15,034,616

 

15,035,075

 

15,042,584

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share

 

$

0.34

 

$

0.48

 

$

0.25

 

$

0.08

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for diluted income per share

 

15,344,038

 

15,217,186

 

15,321,994

 

15,212,141

 

 

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

 

 

4



 

CBRE HOLDING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

3,825

 

$

1,194

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

12,500

 

11,703

 

Deferred compensation plan deferrals

 

4,336

 

5,043

 

Equity income from unconsolidated subsidiaries

 

(6,864

)

(3,644

)

Decrease in receivables

 

9,113

 

22,969

 

Increase in prepaid expenses and other assets

 

(7,005

)

(5,422

)

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

 

(59,651

)

(58,982

)

Decrease in accounts payable and accrued expenses

 

(14,864

)

(822

)

Decrease in income taxes payable

 

(17,540

)

(8,921

)

Other operating activities, net

 

1,595

 

(3,250

)

Net cash used in operating activities

 

(74,555

)

(40,132

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures, net of concessions received

 

(1,171

)

(5,363

)

Acquisition of businesses including net assets acquired, intangibles and goodwill

 

1,343

 

(9,892

)

Other investing activities, net

 

2,224

 

(955

)

Net cash provided by (used in) investing activities

 

2,396

 

(16,210

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from revolver and swingline credit facility

 

140,600

 

134,250

 

Repayment of revolver and swingline credit facility

 

(129,350

)

(104,250

)

Proceeds from (repayment of) senior notes and other loans, net

 

7,330

 

(6,329

)

Repayment of senior secured term loans

 

(4,675

)

(4,676

)

Other financing activities, net

 

266

 

(1,085

)

Net cash provided by financing activities

 

14,171

 

17,910

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(57,988

)

(38,432

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

79,701

 

57,450

 

Effect of currency exchange rate changes on cash

 

1,305

 

(807

)

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

23,018

 

$

18,211

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

26,570

 

$

27,205

 

Income taxes, net of refunds

 

$

19,535

 

$

10,779

 

 

 

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

 

5



 

CBRE HOLDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Nature of Operations

 

            CBRE Holding, Inc., a Delaware corporation, was incorporated on February 20, 2001 as Blum CB Holding Corporation.  On March 26, 2001, Blum CB Holding Corporation changed its name to CBRE Holding, Inc. (the Company).  The Company and its former wholly owned subsidiary, Blum CB Corporation (Blum CB), a Delaware corporation, were created to acquire all of the outstanding shares of CB Richard Ellis Services, Inc. (CBRE), an international real estate services firm. Prior to July 20, 2001, the Company was a wholly owned subsidiary of Blum Strategic Partners, L.P. (Blum Strategic), formerly known as RCBA Strategic Partners, LP, which is an affiliate of Richard C. Blum, a director of the Company and CBRE.

 

            On July 20, 2001, the Company acquired CBRE (the 2001 Merger) pursuant to an Amended and Restated Agreement and Plan of Merger, dated May 31, 2001, among the Company, CBRE and Blum CB.  Blum CB was merged with and into CBRE, with CBRE being the surviving corporation.  The operations of the Company after the 2001 Merger are substantially the same as the operations of CBRE prior to the 2001 Merger.  In addition, the Company has no substantive operations other than its investment in CBRE.

 

2.        New Accounting Pronouncements

 

            In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” which is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.”  This interpretation addresses consolidation of entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks.  The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests and results of operations of a VIE need to be consolidated with its primary beneficiary. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the VIE’s expected residual returns or if the VIE does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties.  For VIEs in which a significant (but not majority) variable interest is held, certain disclosures are required.  The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003.  The consolidation requirements apply to existing VIEs in the first fiscal year or interim period beginning after June 15, 2003.  Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the VIE was established.  The adoption of this interpretation is not expected to have a material impact on the Company’s financial position or results of operations.

 

            In April 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment to Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is applied prospectively and is effective for contracts entered into or modified after June 30, 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations.

 

3.              Basis of Preparation

 

            The accompanying consolidated financial statements have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.  Actual results could differ materially from those estimates.  All significant inter-company transactions and balances have been eliminated, and certain reclassifications have been made to prior periods’ consolidated financial statements to conform to the current period presentation.  The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2003.  The consolidated financial statements and notes to the consolidated financial statements should be read in conjunction with the Company’s filing on form 10-K, which contains the latest available audited consolidated financial statements and notes thereto, as of and for the year ended December 31, 2002.

 

4.     Stock-Based Compensation

 

            In December 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting

 

6



 

for Stock-Based Compensation — Transition and Disclosure.”  This statement amended SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amended the disclosure requirements of SFAS No. 123 to require prominent disclosures about the effect on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation.  Finally, SFAS No. 148 amended APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition and the disclosure provisions are effective for fiscal years ending after December 15, 2002.  The amendments to APB No. 28 are effective for interim periods beginning after December 15, 2002.

 

            The Company continues to account for stock-based compensation under the recognition and measurement principles of APB Opinion No. 25 and did not voluntarily change to the fair value based method of accounting for stock-based compensation.  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 as follows on a pro-forma basis (dollars in thousands, except per share data):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net income as reported

 

$

5,172

 

$

7,289

 

$

3,825

 

$

1,194

 

 

 

 

 

 

 

 

 

 

 

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

 

(147

)

(138

)

(293

)

(275

)

 

 

 

 

 

 

 

 

 

 

Pro forma net income

 

$

5,025

 

$

7,151

 

$

3,532

 

$

919

 

Basic EPS:

 

 

 

 

 

 

 

 

 

As Reported

 

$

0.34

 

$

0.48

 

$

0.25

 

$

0.08

 

Pro Forma

 

$

0.33

 

$

0.48

 

$

0.23

 

$

0.06

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

As Reported

 

$

0.34

 

$

0.48

 

$

0.25

 

$

0.08

 

Pro Forma

 

$

0.33

 

$

0.47

 

$

0.23

 

$

0.06

 

 

            These pro forma amounts may not be representative of future pro forma results.

 

            The weighted average fair value of options and warrants granted was $1.15 and $2.48 for the three months ended June 30, 2003 and 2002, respectively, and $1.58 and $2.47 for the six months ended June 30, 2003 and 2002, respectively. Dividend yield is excluded from the calculation since it is the present intention of the Company to retain all earnings.  The fair value of each option grant and warrant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

2.37

%

4.28

%

2.98

%

4.26

%

Expected volatility

 

0.00

%

0.00

%

0.00

%

0.00

%

Expected life

 

5 years

 

5 years

 

5 years

 

5 years

 

 

            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 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 that the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its employee stock options.

 

7



 

5.  Goodwill and Other Intangible Assets

 

            The Company engages a third-party valuation firm to perform an annual assessment of its goodwill and other intangible assets deemed to have indefinite lives for impairment as of the beginning of the fourth quarter of each year.  The Company also assesses its goodwill and other intangible assets deemed to have indefinite useful lives for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows.

 

            There were no changes in the carrying value of goodwill for the six months ended June 30, 2003.

 

            Other intangible assets totaled $89.5 million and $91.1 million, net of accumulated amortization of $10.2 million and $7.7 million, as of June 30, 2003 and December 31, 2002, respectively, and are comprised of the following (dollars in thousands):

 

 

 

As of June 30, 2003

 

As of December 31, 2002

 

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Gross Carrying Amount

 

Accumulated Amortization

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets

 

 

 

 

 

 

 

 

 

Management contracts

 

$

19,641

 

$

7,232

 

$

18,887

 

$

5,605

 

Loan servicing rights

 

16,346

 

2,961

 

16,234

 

2,134

 

Total

 

$

35,987

 

$

10,193

 

$

35,121

 

$

7,739

 

 

 

 

 

 

 

 

 

 

 

Unamortizable intangible assets

 

 

 

 

 

 

 

 

 

Trademark

 

$

63,700

 

 

 

$

63,700

 

 

 

 

            In accordance with SFAS No. 141, “Business Combinations,” the trademark was separately identified as a result of the 2001 Merger and has an indefinite life.  The management contracts and loan servicing rights are amortized over useful lives ranging up to ten years.  Amortization expense related to these intangible assets was $0.9 million and $1.9 million for the three and six months ended June 30, 2003, respectively.  The estimated amortization expense for the five years ending December 31, 2007 approximates $3.8 million, $3.7 million, $3.7 million, $3.4 million and $3.4 million, respectively.

 

6.   Investments in and Advances to Unconsolidated Subsidiaries

 

            Combined condensed financial information for the entities accounted for using the equity method is as follows (dollars in thousands):

 

Condensed Balance Sheets Information:

 

 

 

June 30, 2003

 

December 31, 2002

 

 

 

 

 

 

 

Current assets

 

$

136,746

 

$

127,635

 

Noncurrent assets

 

$

1,749,316

 

$

1,552,546

 

Current liabilities

 

$

155,825

 

$

108,463

 

Noncurrent liabilities

 

$

692,920

 

$

664,241

 

Minority interest

 

$

4,234

 

$

3,938

 

 

Condensed Statements of Operations Information:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

103,782

 

$

88,576

 

$

202,813

 

$

168,906

 

Operating income

 

$

32,146

 

$

23,344

 

$

55,750

 

$

40,549

 

Net income (loss)

 

$

26,711

 

$

(3,771

)

$

47,787

 

$

9,456

 

 

8



 

            The Company’s investment management business involves investing the Company’s own capital in certain real estate investments together with clients, including its equity investments in CB Richard Ellis Strategic Partners, LP, Global Innovation Partners, L.L.C. and other co-investments included in the table above. The Company has provided investment management, property management, brokerage, appraisal and other professional services to these equity investees.

 

            At December 31, 2002, included in other current assets in the accompanying consolidated balance sheets was a note receivable from the Company’s equity investment in Investor 1031, LLC in the amount of $1.2 million.  This note was issued on June 20, 2002, bore interest at 20.0% per annum and was due on July 15, 2003.  This note and related interest were repaid in full during the second quarter of 2003.

 

7.        Debt

 

            The Company issued $200.0 million in aggregate principal amount of 9¾% Senior Notes due May 15, 2010 (the 9¾% Senior Notes), which were issued and sold by CBRE Escrow, Inc. (CBRE Escrow) on May 22, 2003 and assumed by CBRE in connection with the Insignia Acquisition (see Note 14). The 9¾% Senior Notes are unsecured obligations, senior to all current and future unsecured indebtedness, but subordinated to all current and future secured indebtedness of the Company. The 9¾% Senior Notes are jointly and severally guaranteed on a senior subordinated basis by the Company and its domestic subsidiaries. Interest accrues at a rate of 9¾% per annum and is payable semi-annually in arrears on May 15 and November 15, commencing on November 15, 2003.  The 9¾% Senior Notes are redeemable at the Company’s option, in whole or in part, on or after May 15, 2007 at 104.875% of par on that date and at declining prices thereafter.  In addition, before May 15, 2006, the Company may redeem up to 35.0% of the originally issued amount of the 9¾% Senior Notes at 109¾% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings. In the event of a change of control, the Company is obligated to make an offer to purchase the 9¾% Senior Notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest.  The amount of the 9¾% Senior Notes included in the accompanying consolidated balance sheets was $200.0 million as of June 30, 2003.

 

            In accordance with the terms of the debt offering, the proceeds from the sale of the 9¾% Senior Notes were placed in escrow until the close of the Insignia Acquisition.  Accordingly, the Company had $200.0 million of cash held in escrow included in the accompanying consolidated balance sheet as of June 30, 2003.

 

            The Company issued $229.0 million in aggregate principal amount of 11¼% Senior Subordinated Notes due June 15, 2011 (the Notes), which were issued and sold by Blum CB Corp. for approximately $225.6 million, net of discount, on June 7, 2001 and assumed by CBRE in connection with the 2001 Merger.  The Notes are jointly and severally guaranteed on a senior subordinated basis by the Company and its domestic subsidiaries.  The Notes require semi-annual payments of interest in arrears on June 15 and December 15, having commenced on December 15, 2001, and are redeemable in whole or in part on or after June 15, 2006 at 105.625% of par on that date and at declining prices thereafter.  In addition, before June 15, 2004, the Company may redeem up to 35.0% of the originally issued amount of the Notes at 111¼% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings.  In the event of a change of control, the Company is obligated to make an offer to purchase the Notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest.  The amount of the Notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $226.1 million and $225.9 million as of June 30, 2003 and December 31, 2002, respectively.

 

            In connection with the 2001 Merger, the Company entered into a $325.0 million Senior Credit Facility (the Credit Facility) with Credit Suisse First Boston (CSFB) and other lenders. The Credit Facility is jointly and severally guaranteed by the Company and its domestic subsidiaries and is secured by substantially all of their assets.  The Credit Facility includes a Tranche A term facility of $50.0 million, maturing on July 20, 2007; a Tranche B term facility of $185.0 million, maturing on July 18, 2008; and a revolving line of credit of $90.0 million, including revolving credit loans, letters of credit and a swingline loan facility, maturing on July 20, 2007.  Borrowings under the Tranche A and revolving facility bear interest at varying rates based on the Company’s option, at either the applicable LIBOR plus 2.50% to 3.25% or the alternate base rate plus 1.50% to 2.25% as determined by reference to the Company’s ratio of total debt less available cash to EBITDA, which is defined in the debt agreement.  Borrowings under the Tranche B facility bear interest at varying rates based on the Company’s option at either the applicable LIBOR plus 3.75% or the alternate base rate plus

 

9



 

2.75%.  The alternate base rate is the higher of (1) CSFB’s prime rate or (2) the Federal Funds Effective Rate plus one-half of one percent.

 

            The Tranche A facility will be repaid by July 20, 2007 through quarterly principal payments over six years, which total $7.5 million each year through June 30, 2003 and $8.75 million each year thereafter through July 20, 2007. The Tranche B facility requires quarterly principal payments of approximately $0.5 million, with the remaining outstanding principal due on July 18, 2008. The revolving line of credit requires the repayment of any outstanding balance for a period of 45 consecutive days commencing on any day in the month of December of each year as determined by the Company. The Company repaid its revolving credit facility as of November 5, 2002 and at June 30, 2003 had an outstanding balance on the line of credit of $11.3 million. The total amount outstanding under the credit facility included in senior secured term loans, current maturities of long-term debt and short-term borrowings in the accompanying consolidated balance sheets was $227.6 million and $221.0 million as of June 30, 2003 and December 31, 2002, respectively.

 

            In connection with the 2001 Merger, the Company also issued an aggregate principal amount of $65.0 million of 16.0% Senior Notes due on July 20, 2011 (the Senior Notes).  The Senior Notes are unsecured obligations, senior to all current and future unsecured indebtedness, but subordinated to all current and future secured indebtedness of the Company.  Interest accrues at a rate of 16.0% per year and is payable quarterly in arrears.  Interest may be paid in kind to the extent CBRE’s ability to pay cash dividends is restricted by the terms of the Credit Facility.  Additionally, interest in excess of 12.0% may, at the Company’s option, be paid in kind through July 2006.  The Company elected to pay in kind interest in excess of 12.0%, or 4.0%, that was payable on April 20, 2002, July 20, 2002, October 20, 2002, January 20, 2003 and April 20, 2003.  The Senior Notes are redeemable at the Company’s option, in whole or in part, at 116.0% of par commencing on July 20, 2001 and at declining prices thereafter. As of June 30, 2003, the redemption price was 112.8% of par.  In the event of a change in control, the Company is obligated to make an offer to purchase all of the outstanding Senior Notes at 101.0% of par. The total amount of the Senior Notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $63.3 million and $61.9 million as of June 30, 2003 and December 31, 2002, respectively.

 

            The Senior Notes are solely the Company’s obligation to repay.  CBRE has neither guaranteed nor pledged any of its assets as collateral for the Senior Notes, and is not obligated to provide cash flow to the Company for repayment of these Senior Notes.  However, the Company has no substantive assets or operations other than its investment in CBRE to meet any required principal and interest payments on the Senior Notes.  The Company will depend on CBRE’s cash flows to fund principal and interest payments as they come due.

 

            The Notes, the Credit Facility, the Senior Notes and the 9¾% Senior Notes all contain numerous restrictive covenants that, among other things, limit the Company’s ability to incur additional indebtedness, pay dividends or distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, engage in transactions with affiliates, issue subsidiary equity and enter into consolidations or mergers.  The Credit Facility requires the Company to maintain a minimum coverage ratio of interest and certain fixed charges and a maximum leverage and senior leverage ratio of earnings before interest, taxes, depreciation and amortization to funded debt.  The Credit Facility also requires the Company to pay a facility fee based on the total amount of the unused commitment.

 

            The Company had short-term borrowings of $205.6 million and $111.1 million with related weighted average interest rates of 3.1% and 3.9% as of June 30, 2003 and December 31, 2002, respectively.

 

            A subsidiary of the Company has had a credit agreement with Residential Funding Corporation (RFC) since 2001 for the purpose of funding mortgage loans that will be resold.  On December 16, 2002, the Company entered into the Third Amended and Restated Warehousing Credit and Security Agreement effective December 20, 2002.  The agreement provides for a revolving line of credit of $200.0 million, bears interest at the lower of one-month LIBOR or 2.0% (RFC Base Rate) plus 1.0% and expires on August 31, 2003. On March 28, 2003, the Company was notified that effective May 1, 2003, the RFC Base Rate would be lowered to the greater of one-month LIBOR or 1.5%. On June 25, 2003, the agreement was further modified to provide a temporary revolving line of credit increase of $200.0 million that resulted in a total line of credit equaling $400.0 million, which expires on August 30, 2003 and to change the RFC Base Rate to one-month LIBOR plus 1.0%.

 

10



 

            During the quarter ended June 30, 2003, the Company had a maximum of $178.7 million revolving line of credit principal outstanding with RFC.  At June 30, 2003 and December 31, 2002, respectively, the Company had a $138.2 million and a $63.1 million warehouse line of credit outstanding, which are included in short-term borrowings in the accompanying consolidated balance sheets.  Additionally, the Company had a $138.2 million and a $63.1 million warehouse receivable, which are also included in the accompanying consolidated balance sheets as of June 30, 2003 and December 31, 2002, respectively.

 

            A subsidiary of the Company has a credit agreement with JP Morgan Chase.  The credit agreement provides for a non-recourse revolving line of credit of up to $20.0 million, bears interest at 1.0% in excess of the bank’s cost of funds and expires on May 28, 2004.  At June 30, 2003 and December 31, 2002 the Company had no revolving line of credit principal outstanding with JP Morgan Chase.

 

            During 2001, the Company incurred $37.2 million of non-recourse debt through a joint venture.  In June 2003, the maturity date on this non-recourse debt was extended to June 24, 2004.  At June 30, 2003 and December 31, 2002, respectively, the Company had $39.3 million and $40.0 million of non-recourse debt outstanding, which is included in short-term borrowings in the accompanying consolidated balance sheets.

 

8.  Commitments and Contingencies

 

            The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. 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.

 

            A subsidiary of the Company has an agreement with Fannie Mae to fund the purchase of a $104.6 million loan portfolio using proceeds from its RFC line of credit. A 100% participation in the loan portfolio was sold to Fannie Mae with the Company retaining the credit risk on the first 2% of losses incurred on the underlying portfolio of commercial mortgage loans. The Company has collateralized a portion of its obligation to cover the first 1% of losses through a letter of credit in favor of Fannie Mae for a total of approximately $1.0 million.

 

            The Company had outstanding letters of credit totaling $17.4 million and $7.8 million as of June 30, 2003 and December 31, 2002, respectively, which include the Fannie Mae letter of credit discussed in the preceding paragraph. The letters of credit expire at varying dates through March 2004.

 

            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. These co-investments typically range from 2% to 5% of the equity in a particular fund.  As of June 30, 2003, the Company had committed an additional $33.1 million to fund future co-investments.

 

9.  Comprehensive Income

 

            Comprehensive income consists of net income and other comprehensive income (loss).  Accumulated other comprehensive loss consists of foreign currency translation adjustments and a minimum pension liability adjustment. Foreign currency translation adjustments exclude income tax expense (benefit) given that the earnings of non-US subsidiaries are deemed to be reinvested for an indefinite period of time.

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,172

 

$

7,289

 

$

3,825

 

$

1,194

 

Foreign currency translation (loss) gain

 

(3,395

)

10,564

 

(3,274

)

10,312

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

1,777

 

$

17,853

 

$

551

 

$

11,506

 

 

11



 

10.  Per Share Information

 

            Basic income per share for the Company was computed by dividing the net income by the weighted average number of common shares outstanding of 15,040,868 and 15,034,616 for the three months ended June 30, 2003 and 2002, respectively, and 15,035,075 and 15,042,584 for the six months ended June 30, 2003 and 2002, respectively.

 

            Diluted income per share for the three months ended June 30, 2003 and 2002 included the dilutive effect of contingently issuable shares of 303,170 and 182,570, respectively.  Diluted income per share for the six months ended June 30, 2003 and 2002 included the dilutive effect of contingently issuable shares of 286,919 and 169,557, respectively.

 

11.  Fiduciary Funds

 

            The consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which amounted to $400.7 million and $414.6 million at June 30, 2003 and December 31, 2002, respectively.

 

12.  Guarantor and Nonguarantor Financial Statements

 

            In connection with the 2001 Merger with Blum CB, and as part of the financing of the 2001 Merger, CBRE assumed an aggregate of $229.0 million in Senior Subordinated Notes (the Notes) due June 15, 2011.  These Notes are unsecured and rank equally in right of payment with any of the Company’s senior subordinated unsecured indebtedness.  The Notes are effectively subordinated to indebtedness and other liabilities of the Company’s subsidiaries that are not guarantors of the Notes.  The Notes are guaranteed on a full, unconditional, joint and several basis by the Company, CBRE and CBRE’s domestic subsidiaries.

 

            The following condensed consolidating financial information includes:

 

(1) Condensed consolidating balance sheets as of June 30, 2003 and December 31, 2002; condensed consolidating statements of operations for the three and six months ended June 30, 2003 and 2002, and condensed consolidating statements of cash flows for the six months ended June 30, 2003 and 2002, of (a) Holding, the parent, (b) CBRE, which is the subsidiary issuer, (c) the guarantor subsidiaries, (d) the nonguarantor subsidiaries and (e) the Company on a consolidated basis; and (2) Elimination entries necessary to consolidate CBRE Holding, Inc., the parent, with CBRE and its guarantor and nonguarantor subsidiaries.

 

            Investments in consolidated subsidiaries are presented using the equity method of accounting.  The principal elimination entries eliminate investments in consolidated subsidiaries and inter-company balances and transactions.

 

12



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2003

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor Subsidiaries

 

Nonguarantor Subsidiaries

 

Elimination

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9

 

$

196

 

$

14,954

 

$

7,859

 

$

 

$

23,018

 

Receivables, less allowance for doubtful accounts

 

35

 

280

 

57,970

 

95,939

 

 

154,224

 

Warehouse receivable

 

 

 

138,240

 

 

 

138,240

 

Prepaid and other current assets

 

21,726

 

19,739

 

15,913

 

13,863

 

(17,717

)

53,524

 

Total current assets

 

21,770

 

20,215

 

227,077

 

117,661

 

(17,717

)

369,006

 

Property and equipment, net

 

 

 

52,143

 

16,816

 

 

68,959

 

Goodwill

 

 

 

442,965

 

134,172

 

 

577,137

 

Other intangible assets, net

 

 

 

87,574

 

1,920

 

 

89,494

 

Deferred compensation assets

 

 

69,533

 

 

 

 

69,533

 

Investment in and advances to unconsolidated subsidiaries

 

 

4,774

 

46,021

 

6,896

 

 

57,691

 

Investment in consolidated subsidiaries

 

285,237

 

300,020

 

64,654

 

 

(649,911

)

 

Inter-company loan receivable

 

 

446,513

 

 

 

(446,513

)

 

Deferred tax assets, net

 

35,972

 

 

 

 

 

35,972

 

Cash held in escrow

 

 

200,000

 

 

 

 

200,000

 

Other assets

 

4,611

 

24,395

 

13,766

 

51,337

 

 

94,109

 

Total assets

 

$

347,590

 

$

1,065,450

 

$

934,200

 

$

328,802

 

$

(1,114,141

)

$

1,561,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,133

 

$

13,866

 

$

24,626

 

$

57,471

 

$

 

$

98,096

 

Inter-company payable

 

17,717

 

 

 

 

(17,717

)

 

Compensation and employee benefits payable

 

 

 

39,170

 

22,321

 

 

61,491

 

Accrued bonus and profit sharing

 

 

 

28,765

 

21,088

 

 

49,853

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse line of credit

 

 

 

138,240

 

 

 

138,240

 

Revolving credit and swingline facility

 

 

11,250

 

 

 

 

11,250

 

Other

 

 

 

876

 

55,273

 

 

56,149

 

Total short-term borrowings

 

 

11,250

 

139,116

 

55,273

 

 

205,639

 

Current maturities of long-term debt

 

 

10,288

 

 

472

 

 

10,760

 

Total current liabilities

 

19,850

 

35,404

 

231,677

 

156,625

 

(17,717

)

425,839

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount

 

 

226,055

 

 

 

 

226,055

 

Senior secured term loans

 

 

206,013

 

 

 

 

206,013

 

9¾% senior notes

 

 

200,000

 

 

 

 

200,000

 

16% senior notes, net of unamortized discount

 

63,344

 

 

 

 

 

63,344

 

Other long-term debt

 

 

 

12,129

 

191

 

 

12,320

 

Inter-company loan payable

 

 

 

370,513

 

76,000

 

(446,513

)

 

Total long-term debt

 

63,344

 

632,068

 

382,642

 

76,191

 

(446,513

)

707,732

 

Deferred compensation liability

 

 

112,741

 

 

 

 

112,741

 

Other liabilities

 

11,724

 

 

19,861

 

25,251

 

 

56,836

 

Total liabilities

 

94,918

 

780,213

 

634,180

 

258,067

 

(464,230

)

1,303,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

 

6,081

 

 

6,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

252,672

 

285,237

 

300,020

 

64,654

 

(649,911

)

252,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

347,590

 

$

1,065,450

 

$

934,200

 

$

328,802

 

$

(1,114,141

)

$

1,561,901

 

 

13



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2002

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor Subsidiaries

 

Nonguarantor Subsidiaries

 

Elimination

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

127

 

$

54

 

$

74,173

 

$

5,347

 

$

 

$

79,701

 

Receivables, less allowance for doubtful accounts

 

 

40

 

61,624

 

104,549

 

 

166,213

 

Warehouse receivable

 

 

 

63,140

 

 

 

63,140

 

Prepaid and other current assets

 

18,723

 

22,201

 

8,432

 

7,729

 

(20,199

)

36,886

 

Total current assets

 

18,850

 

22,295

 

207,369

 

117,625

 

(20,199

)

345,940

 

Property and equipment, net

 

 

 

51,419

 

15,215

 

 

66,634

 

Goodwill

 

 

 

442,965

 

134,172

 

 

577,137

 

Other intangible assets, net

 

 

 

89,075

 

2,007

 

 

91,082

 

Deferred compensation assets

 

 

63,642

 

 

 

 

63,642

 

Investment in and advances to unconsolidated subsidiaries

 

 

4,782

 

39,205

 

6,221

 

 

50,208

 

Investment in consolidated subsidiaries

 

302,593

 

322,794

 

66,162

 

 

(691,549

)

 

Inter-company loan receivable

 

 

429,396

 

 

 

(429,396

)

 

Deferred tax assets, net

 

36,376

 

 

 

 

 

36,376

 

Other assets

 

4,896

 

17,464

 

20,453

 

51,044

 

 

93,857

 

Total assets

 

$

362,715

 

$

860,373

 

$

916,648

 

$

326,284

 

$

(1,141,144

)

$

1,324,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,137

 

$

4,610

 

$

36,895

 

$

58,773

 

$

 

$

102,415

 

Inter-company payable

 

20,199

 

 

 

 

(20,199

)

 

Compensation and employee benefits payable

 

 

 

40,938

 

22,796

 

 

63,734

 

Accrued bonus and profit sharing

 

 

 

59,942

 

43,916

 

 

103,858

 

Income taxes payable

 

15,451

 

 

 

 

 

15,451

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse line of credit

 

 

 

63,140

 

 

 

63,140

 

Other

 

 

 

16

 

47,909

 

 

47,925

 

Total short-term borrowings

 

 

 

63,156

 

47,909

 

 

111,065

 

Current maturities of long-term debt

 

 

9,975

 

 

736

 

 

10,711

 

Total current liabilities

 

37,787

 

14,585

 

200,931

 

174,130

 

(20,199

)

407,234

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount

 

 

225,943

 

 

 

 

225,943

 

Senior secured term loans

 

 

211,000

 

 

 

 

211,000

 

16% senior notes, net of unamortized discount

 

61,863

 

 

 

 

 

61,863

 

Other long-term debt

 

 

 

12,129

 

198

 

 

12,327

 

Inter-company loan payable

 

 

 

362,344

 

67,052

 

(429,396

)

 

Total long-term debt

 

61,863

 

436,943

 

374,473

 

67,250

 

(429,396

)

511,133

 

Deferred compensation liability

 

 

106,252

 

 

 

 

106,252

 

Other liabilities

 

11,724

 

 

18,450

 

13,127

 

 

43,301

 

Total liabilities

 

111,374

 

557,780

 

593,854

 

254,507

 

(449,595

)

1,067,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

 

5,615

 

 

5,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

251,341

 

302,593

 

322,794

 

66,162

 

(691,549

)

251,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

362,715

 

$

860,373

 

$

916,648

 

$

326,284

 

$

(1,141,144

)

$

1,324,876

 

 

14



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2003

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor Subsidiaries

 

Nonguarantor Subsidiaries

 

Elimination

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

227,829

 

$

93,888

 

$

 

$

321,717

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

113,003

 

40,063

 

 

153,066

 

Operating, administrative and other

 

56

 

2,742

 

89,855

 

44,768

 

 

137,421

 

Depreciation and amortization

 

 

 

4,308

 

2,021

 

 

6,329

 

Equity income from unconsolidated subsidiaries

 

 

 

(3,673

)

(128

)

 

(3,801

)

Merger-related charges

 

 

 

1,739

 

1,571

 

 

3,310

 

Operating (loss) income

 

(56

)

(2,742

)

22,597

 

5,593

 

 

25,392

 

Interest income

 

33

 

9,471

 

629

 

35

 

(9,467

)

701

 

Interest expense

 

2,944

 

10,204

 

11,247

 

2,012

 

(9,467

)

16,940

 

Equity income of consolidated subsidiaries

 

7,222

 

6,893

 

1,879

 

 

(15,994

)

 

Income before (benefit) provision for income tax

 

4,255

 

3,418

 

13,858

 

3,616

 

(15,994

)

9,153

 

(Benefit) provision for income tax

 

(917

)

(3,804

)

6,965

 

1,737

 

 

3,981

 

Net income

 

$

5,172

 

$

7,222

 

$

6,893

 

$

1,879

 

$

(15,994

)

$

5,172

 

 

 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2002

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor Subsidiaries

 

Nonguarantor Subsidiaries

 

Elimination

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

205,051

 

$

79,842

 

$

 

$

284,893

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

97,778

 

31,004

 

 

128,782

 

Operating, administrative and other

 

140

 

1,210

 

86,962

 

36,041

 

 

124,353

 

Depreciation and amortization

 

 

 

2,446

 

1,665

 

 

4,111

 

Equity income from unconsolidated subsidiaries

 

 

(179

)

(1,280

)

(180

)

 

(1,639

)

Merger-related charges

 

 

23

 

 

 

 

23

 

Operating (loss) income

 

(140

)

(1,054

)

19,145

 

11,312

 

 

29,263

 

Interest income

 

40

 

13,250

 

297

 

168

 

(13,221

)

534

 

Interest expense

 

2,821

 

10,943

 

12,279

 

2,082

 

(13,221

)

14,904

 

Equity income of consolidated subsidiaries

 

9,499

 

11,260

 

6,951

 

 

(27,710

)

 

Income before (benefit) provision for income tax

 

6,578

 

12,513

 

14,114

 

9,398

 

(27,710

)

14,893

 

(Benefit) provision for income tax

 

(711

)

3,014

 

2,854

 

2,447

 

 

7,604

 

Net income

 

$

7,289

 

$

9,499

 

$

11,260

 

$

6,951

 

$

(27,710

)

$

7,289

 

 

15



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2003

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor Subsidiaries

 

Nonguarantor Subsidiaries

 

Elimination

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

418,319

 

$

167,122

 

$

 

$

585,441

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

202,700

 

73,965

 

 

276,665

 

Operating, administrative and other

 

156

 

4,710

 

172,890

 

85,840

 

 

263,596

 

Depreciation and amortization

 

 

 

8,542

 

3,958

 

 

12,500

 

Equity (income) loss from unconsolidated subsidiaries

 

 

(24

)

(6,922

)

82

 

 

(6,864

)

Merger-related charges

 

 

 

1,739

 

1,571

 

 

3,310

 

Operating (loss) income

 

(156

)

(4,686

)

39,370

 

1,706

 

 

36,234

 

Interest income

 

69

 

18,784

 

1,084

 

601

 

(18,762

)

1,776

 

Interest expense

 

5,853

 

20,270

 

20,102

 

3,801

 

(18,762

)

31,264

 

Equity income (loss) of consolidated subsidiaries

 

7,553

 

10,271

 

(2,770

)

 

(15,054

)

 

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

 

1,613

 

4,099

 

17,582

 

(1,494

)

(15,054

)

6,746

 

(Benefit) provision for income tax

 

(2,212

)

(3,454

)

7,311

 

1,276

 

 

2,921

 

Net income (loss)

 

$

3,825

 

$

7,553

 

$

10,271

 

$

(2,770

)

$

(15,054

)

$

3,825

 

 

 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2002

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor Subsidiaries

 

Nonguarantor Subsidiaries

 

Elimination

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

373,611

 

$

135,272

 

$

 

$

508,883

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

169,433

 

58,403

 

 

227,836

 

Operating, administrative and other

 

240

 

3,588

 

168,124

 

68,254

 

 

240,206

 

Depreciation and amortization

 

 

 

7,647

 

4,056

 

 

11,703

 

Equity income from unconsolidated subsidiaries

 

 

(346

)

(2,558

)

(740

)

 

(3,644

)

Merger-related charges

 

 

605

 

 

 

 

605

 

Operating (loss) income

 

(240

)

(3,847

)

30,965

 

5,299

 

 

32,177

 

Interest income

 

85

 

23,065

 

1,000

 

254

 

(23,006

)

1,398

 

Interest expense

 

5,615

 

21,410

 

21,634

 

5,268

 

(23,006

)

30,921

 

Equity income (loss) of consolidated subsidiaries

 

4,288

 

9,429

 

(305

)

 

(13,412

)

 

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

 

(1,482

)

7,237

 

10,026

 

285

 

(13,412

)

2,654

 

(Benefit) provision for income tax

 

(2,676

)

2,949

 

597

 

590

 

 

1,460

 

Net income

 

$

1,194

 

$

4,288

 

$

9,429

 

$

(305

)

$

(13,412

)

$

1,194

 

 

 

16



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2003

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor Subsidiaries

 

Nonguarantor Subsidiaries

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:

 

$

(19,622

)

$

275

 

$

(30,711

)

$

(24,497

)

$

(74,555

)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures, net of concessions received

 

 

 

(6,450

)

5,279

 

(1,171

)

Acquisition of businesses including net assets acquired, intangibles and goodwill

 

 

 

1,343

 

 

1,343

 

Other investing activities, net

 

 

26

 

2,682

 

(484

)

2,224

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

 

26

 

(2,425

)

4,795

 

2,396

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from revolver and swingline credit facility

 

 

140,600

 

 

 

140,600

 

Repayment of revolver and swingline credit facility

 

 

(129,350

)

 

 

(129,350

)

Proceeds from short term borrowings and other loans, net

 

 

 

 

7,330

 

7,330

 

Repayment of senior secured term loans

 

 

(4,675

)

 

 

(4,675

)

Decrease (increase) in intercompany receivables, net

 

19,031

 

(6,734

)

(26,083

)

13,786

 

 

Other financing activities, net

 

473

 

 

 

(207

)

266

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

19,504

 

(159

)

(26,083

)

20,909

 

14,171

 

 

 

 

 

 

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.

 

(118

)

142

 

(59,219

)

1,207

 

(57,988

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

127

 

54

 

74,173

 

5,347

 

79,701

 

Effect of currency exchange rate changes on cash

 

 

 

 

1,305

 

1,305

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

9

 

$

196

 

$

14,954

 

$

7,859

 

$

23,018

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DATA:

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

Interest (net of amount capitalized)

 

$

4,038

 

$

20,907

 

$

526

 

$

1,099

 

$

26,570

 

Income taxes, net of refunds

 

$

19,535

 

$

 

$

 

$

 

$

19,535

 

 

 

 

17



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2002

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor Subsidiaries

 

Nonguarantor Subsidiaries

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:

 

$

1,055

 

$

(3,332

)

$

(26,271

)

$

(11,584

)

$

(40,132

)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures, net of concessions received

 

 

 

(4,002

)

(1,361

)

(5,363

)

Acquisition of businesses including net assets acquired, intangibles and goodwill

 

 

(10,334

)

442

 

 

(9,892

)

Other investing activities, net

 

 

 

(2,231

)

1,276

 

(955

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(10,334

)

(5,791

)

(85

)

(16,210

)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from revolver and swingline credit facility

 

 

134,250

 

 

 

134,250

 

Repayment of revolver and swingline credit facility

 

 

(104,250

)

 

 

(104,250

)

Repayment of senior notes and other loans, net

 

 

 

(2,634

)

(3,695

)

(6,329

)

Repayment of senior secured term loans

 

 

(4,676

)

 

 

(4,676

)

(Increase) decrease in intercompany receivables, net

 

 

(12,296

)

3,827

 

8,469

 

 

Other financing activities, net

 

(842

)

(151

)

(80

)

(12

)

(1,085

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(842

)

12,877

 

1,113

 

4,762

 

17,910

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.

 

213

 

(789

)

(30,949

)

(6,907

)

(38,432

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

3

 

931

 

42,204

 

14,312

 

57,450

 

Effect of exchange rate changes on cash

 

 

 

 

(807

)

(807

)

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

216

 

$

142

 

$

11,255

 

$

6,598

 

$

18,211

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DATA:

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

Interest (net of amount capitalized)

 

$

4,550

 

$

18,945

 

$

895

 

$

2,815

 

$

27,205

 

Income taxes, net of refunds

 

$

10,779

 

$

 

$

 

$

 

$

10,779

 

 

18



 

13.            Industry Segments

 

            The Company reports its operations through three geographically organized segments:  (1) Americas, (2) Europe, Middle East and Africa (EMEA) and (3) Asia Pacific.  The Americas consist of operations in the U.S., Canada, Mexico and South America.  EMEA mainly consists of operations in Europe, while Asia Pacific includes operations in Asia, Australia and New Zealand.  The following table summarizes the revenue and operating income by operating segment (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Revenue

 

 

 

 

 

 

 

 

 

Americas

 

$

242,537

 

$

215,908

 

$

442,487

 

$

394,521

 

EMEA

 

52,152

 

43,298

 

97,630

 

73,371

 

Asia Pacific

 

27,028

 

25,687

 

45,324

 

40,991

 

 

 

$

321,717

 

$

284,893

 

$

585,441

 

$

508,883

 

Operating income

 

 

 

 

 

 

 

 

 

Americas

 

$

20,826

 

$

18,468

 

$

35,290

 

$

26,600

 

EMEA

 

1,383

 

4,953

 

599

 

1,950

 

Asia Pacific

 

3,183

 

5,842

 

345

 

3,627

 

 

 

25,392

 

29,263

 

36,234

 

32,177

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

701

 

534

 

1,776

 

1,398

 

Interest expense

 

16,940

 

14,904

 

31,264

 

30,921

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income tax

 

$

9,153

 

$

14,893

 

$

6,746

 

$

2,654

 

 

14.    Subsequent Event

 

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

 

            In conjunction with and immediately prior to the Insignia Acquisition, Island Fund I, L.L.C. (Island), a Delaware limited liability company, which is affiliated with Andrew L. Farkas, Insignia’s former Chairman and Chief Executive Officer, and certain of Insignia’s other former officers, completed the purchase of certain real estate investment assets of Insignia, pursuant to a Purchase Agreement, dated as of May 28, 2003 (the Island Purchase Agreement), by and among Insignia, the Company, CBRE, the Merger Sub and Island.

 

            Pursuant to the terms of the Insignia Acquisition Agreement, as a result of the completion of the Insignia Acquisition, the sale pursuant to the Island Purchase Agreement prior to the Insignia Acquisition and the satisfaction of certain conditions set forth in the Insignia Acquisition Agreement, (i) each issued and outstanding share of Insignia Common Stock (other than treasury shares), par value $0.01 per share, was converted into the right to receive $11.156 in cash, without interest (the Insignia Common Stock Merger Consideration), (ii) each issued and outstanding share of Insignia’s Series A Preferred Stock, par value $0.01 per share, and Series B Preferred Stock, par value $0.01 per share, was converted into the right to receive $100.00 per share, plus accrued and unpaid dividends, (iii) all outstanding warrants and options other than as described below, whether vested or unvested, were canceled and represented the right to receive a cash payment, without interest, equal to the excess, if any, of the Insignia Common Stock Merger Consideration over the per share exercise price of the option or warrant, multiplied by the number of shares of Insignia Common Stock subject to the option or warrant less any applicable withholding taxes, and (iv) outstanding options to purchase Insignia Common Stock granted pursuant to Insignia’s 1998 Stock Investment Plan, whether vested or unvested, were canceled and represented the right to receive a cash payment, without interest, equal to the excess, if any, of the higher of (x) the Insignia Common Stock Merger Consideration, or (y) the highest final sale price per share of the

 

19



 

Insignia Common Stock as reported on the New York Stock Exchange (NYSE) at any time during the 60-day period preceding the closing of the Insignia Acquisition (which was $11.20), over the exercise price of the options, multiplied by the number of shares of Insignia Common Stock subject to the options, less any applicable withholding taxes.  Following the Insignia Acquisition, the Insignia Common Stock was delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, as amended.

 

            The funding to complete the Insignia Acquisition, as well as the refinancing of substantially all of the outstanding indebtedness of Insignia, was obtained through (i) the sale of 6,587,135 shares of the Company’s Class B Common Stock, par value $0.01 per share, to Blum Strategic, a Delaware limited partnership, Blum Strategic Partners II, L.P., a Delaware limited partnership and Blum Strategic Partners II GmbH & Co. KG, a German limited partnership, for an aggregate cash purchase price of $105,394,160, (ii) the sale of 227,865 shares of the Company’s Class A Common Stock, par value $.01 per share, to DLJ Investment Partners, L.P., a Delaware limited partnership, DLJ Investment Partners II, L.P., a Delaware limited partnership, DLJIP II Holdings, L.P., a Delaware limited partnership, for an aggregate cash purchase price of $3,645,840, (iii) the sale of 625,000 shares of the Company’s Class A Common Stock to California Public Employees’ Retirement System for an aggregate cash purchase price of $10,000,000, (iv) the sale of 60,000 shares of the Company’s Class B Common Stock to Frederic V. Malek for an aggregate cash purchase price of $960,000, (v) the release from escrow of the net proceeds from the offering by CBRE Escrow, a wholly owned subsidiary of CBRE that merged with and into CBRE in connection with the Insignia Acquisition, of $200.0 million of 9¾% Senior Notes due May 15, 2010, which Senior Notes had been issued and sold by CB Escrow on May 22, 2003, (vi) $75.0 million of term loan borrowings under the Amended and Restated Credit Agreement (see Note 14), dated as of May 22, 2003, by and among CBRE, the lenders named therein and CSFB as Administrative Agent and Collateral Agent and (vii) $36,870,229.61 of cash proceeds from the completion of the sale to Island.

 

            In connection with the Insignia Acquisition, the Company entered into an amended and restated credit agreement with CSFB and other lenders. The amendment and restatement modified certain terms of the Company’s existing Credit Facility.  The Credit Facility was, and the amended and restated Credit Facility continues to be, jointly and severally guaranteed by the Company and its domestic subsidiaries and secured by substantially all of their assets.  The amended and restated Credit Facility includes a Tranche A term facility of $50.0 million (which was fully drawn in connection with the 2001 Merger), maturing on July 20, 2007; a Tranche B term facility of $260.0 million ($185.0 million of which was drawn in connection with the 2001 Merger), maturing on July 18, 2008; and a revolving line of credit of $90.0 million, including revolving credit loans, letters of credit and a swingline loan facility, maturing on July 20, 2007.  After the amendment and restatement, borrowings under the Tranche A and revolving facility bear interest at varying rates based on the Company’s option, at either the applicable LIBOR plus 3.00% to 3.75% or the alternate base rate plus 2.00% to 2.75%, in both cases as determined by reference to the Company’s ratio of total debt less available cash to EBITDA, which are defined in the amended and restated credit agreement.  After the amendment and restatement, borrowings under the Tranche B facility bear interest at varying rates based on the Company’s option at either the applicable LIBOR plus 4.25% or the alternate base rate plus 3.25%.  The alternate base rate is the higher of (1) CSFB’s prime rate or (2) the Federal Funds Effective Rate plus one-half of one percent.

 

20



 

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

 

Introduction

 

            Management’s discussion and analysis of financial condition, results of operations, liquidity and capital resources contained within this report on Form 10-Q is more clearly understood when read in conjunction with the Notes to the Consolidated Financial Statements.  The Notes to the Consolidated Financial Statements elaborate on certain terms that are used throughout this discussion and provide information about the Company and the basis of presentation used in this report on Form 10-Q.

 

            On July 20, 2001, the Company acquired CB Richard Ellis Services, Inc. (CBRE), (the 2001 Merger), pursuant to an Amended and Restated Agreement and Plan of Merger, dated May 31, 2001 (the 2001 Merger Agreement), among the Company, CBRE and Blum CB Corp. (Blum CB), a wholly owned subsidiary of the Company.  Blum CB was merged with and into CBRE, with CBRE being the surviving corporation.  At the effective time of the 2001 Merger, CBRE became a wholly owned subsidiary of the Company.

 

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

 

Three Months Ended June 30, 2003 Compared to the Three Months Ended June 30, 2002

 

            The Company reported consolidated net income of $5.2 million for the three months ended June 30, 2003 on revenue of $321.7 million as compared to consolidated net income of $7.3 million on revenue of $284.9 million for the three months ended June 30, 2002.

 

            Revenue on a consolidated basis increased $36.8 million or 12.9% during the three months ended June 30, 2003 as compared to the three months ended June 30, 2002.  The increase was driven by higher sales transaction revenue and appraisal fees in the Americas as well as increased worldwide lease transaction revenue and consultation fees.

 

            Cost of services on a consolidated basis totaled $153.1 million, an increase of $24.3 million or 18.9% from the second quarter of 2002. This increase was mainly due to higher commission expense driven by increased sales transaction revenue in the Americas as well as increased worldwide payroll related costs, primarily insurance. As a result of the latter, cost of services as a percentage of revenue increased from 45.2% for the second quarter of 2002 to 47.6% for the second quarter of the current year.

 

            Operating, administrative and other expenses on a consolidated basis were $137.4 million, an increase of $13.1 million or 10.5% for the three months ended June 30, 2003 as compared to the second quarter of the prior year. The increase was primarily driven by higher worldwide bonus and payroll related expenses, partially offset by foreign currency transaction gains resulting from the weaker United States (U.S.) dollar.  Included in the 2003 bonus amount was an accrual for a one-time performance award of approximately $5.0 million.

 

            Depreciation and amortization expense on a consolidated basis increased by $2.2 million or 54.0% mainly due to an increase in amortization expense for the three months ended June 30 2003 as compared to the same period of the prior year.  This was mainly due to a one-time reduction of amortization expense recorded in the prior year quarter, which arose from the adjustment of certain intangible assets to their estimated fair values as of their acquisition date as determined by independent third party appraisers.

 

            Equity income from unconsolidated subsidiaries increased $2.2 million or 131.9% for the three months ended June 30, 2003 as compared to the three months ended June 30, 2002 primarily due to a gain on sale of owned units in an investment fund.

 

21



 

            Merger-related charges on a consolidated basis were $3.3 million for the three months ended June 30, 2003 and primarily consisted of consulting and severance costs attributable to the Insignia Acquisition.

 

            Consolidated interest expense was $16.9 million, an increase of $2.0 million or 13.7% for the three months ended June 30, 2003 as compared to the second quarter of the prior year.  This increase was primarily due to the additional debt issued in connection with the Insignia Acquisition.

 

            Provision for income tax on a consolidated ba­sis was $4.0 million for the three months ended June 30, 2003 as compared to $7.6 million for the three months ended June 30, 2002.  The effective tax rate decreased from 51.1% for the second quarter of 2002 to 43.5% for the second quarter of 2003. This decrease was primarily due to non-taxable gains associated with the Company’s deferred compensation plan in the current year versus the non-deductible losses experienced in the prior year.

 

Six Months Ended June 30, 2003 Compared to the Six Months Ended June 30, 2002

 

            The Company reported consolidated net income of $3.8 million for the six months ended June 30, 2003 on revenue of $585.4 million as compared to consolidated net income of $1.2 million on revenue of $508.9 million for the six months ended June 30, 2002.

 

            Revenue on a consolidated basis increased $76.6 million or 15.0% during the six months ended June 30, 2003 as compared to the six months ended June 30, 2002.  The increase was driven by significantly higher worldwide sales transaction revenue as well as increased worldwide appraisal and consultation fees, and lease transaction revenue.

 

            Cost of services on a consolidated basis totaled $276.7 million, an increase of $48.8 million or 21.4% from the six months ended June 30, 2002. This increase was mainly due to higher worldwide sales transaction commissions driven by increased worldwide sales transaction revenue as well as increased worldwide payroll related costs, primarily insurance. As  a result of the latter, cost of services as a percentage of revenue increased from 44.8% for the six months ended June 30, 2002 to 47.3% for the six months ended June 30, 2003.

 

            Operating, administrative and other expenses on a consolidated basis were $263.6 million, an increase of $23.4 million or 9.7% for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. The increase was primarily driven by higher worldwide bonus and payroll related expenses as well as increased consulting expenses in the Americas and Europe.  These increases were partially offset by foreign currency transaction gains resulting from the weaker U.S. dollar.  Included in the 2003 bonus amount was an accrual for a one-time performance award of approximately $5.0 million.

 

            Depreciation and amortization expense on a consolidated basis increased by $0.8 million or 6.8% mainly due to an increase in amortization expense for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002.  This was mainly due to a one-time reduction of amortization expense recorded in the prior year, which arose from the adjustment of certain intangible assets to their estimated fair values as of their acquisition date as determined by independent third party appraisers.

 

            Equity income from unconsolidated subsidiaries increased $3.2 million or 88.4% for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002 primarily due to a gain on sale of owned units in an investment fund.

 

            Merger-related charges on a consolidated basis were $3.3 million and $0.6 million for the six months ended June 30, 2003 and 2002, respectively.  The current year charges primarily consisted of consulting and severance costs attributable to the Insignia Acquisition.  The prior year charges mainly represented costs for professional services related to the 2001 Merger.

 

            Consolidated interest expense for the six months ended June 30, 2003 was comparable to the six months ended June 30, 2002 at $31.3 million.

 

            Provision for income tax on a consolidated ba­sis was $2.9 million for the six months ended June 30, 2003 as compared to $1.5 million for the six months ended June 30, 2002.  The effective tax rate decreased from 55.0% for the six months ended June 30, 2002 to 43.3% for the six months ended June 30, 2003. This decrease was primarily due to non-taxable gains associated with the Company’s deferred compensation plan in the current year versus the non-deductible losses experienced in the prior year.

 

22



 

Segment Operations

 

            The Company reports its operations through three geographically organized segments:  (1) Americas, (2) Europe, Middle East and Africa (EMEA) and (3) Asia Pacific.  The Americas consist of operations in the U.S., Canada, Mexico and South America.  EMEA mainly consists of operations in Europe, while Asia Pacific includes operations in Asia, Australia and New Zealand.  The Americas current year results include merger-related charges of $1.7 million attributable to the Insignia Acquisition.  The Americas prior year results include merger-related charges of $0.6 million, which represent costs for professional services related to the 2001 Merger.  The EMEA current year results include merger-related charges of $1.6 million associated with the Insignia Acquisition.  The following table summarizes the revenue, costs and expenses, and operating income by operating segment for the periods ended June 30, 2003 and 2002 (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Americas

 

 

 

 

 

 

 

 

 

Revenue

 

$

242,537

 

$

215,908

 

$

442,487

 

$

394,521

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

120,936

 

103,643

 

215,929

 

181,254

 

Operating, administrative and other

 

97,985

 

92,634

 

187,182

 

180,961

 

Depreciation and amortization

 

4,669

 

2,716

 

9,191

 

8,207

 

Equity income from unconsolidated subsidiaries

 

(3,617

)

(1,576

)

(6,843

)

(3,106

)

Merger-related charges

 

1,738

 

23

 

1,738

 

605

 

Operating income

 

$

20,826

 

$

18,468

 

$

35,290

 

$

26,600

 

EBITDA

 

$

25,495

 

$

21,184

 

$

44,481

 

$

34,807

 

EBITDA margin

 

10.5

%

9.8

%

10.1

%

8.8

%

 

 

 

 

 

 

 

 

 

 

EMEA

 

 

 

 

 

 

 

 

 

Revenue

 

$

52,152

 

$

43,298

 

$

97,630

 

$

73,371

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

20,818

 

15,521

 

40,381

 

29,281

 

Operating, administrative and other

 

27,489

 

21,964

 

53,149

 

40,176

 

Depreciation and amortization

 

908

 

861

 

1,821

 

1,974

 

Equity (income) loss from unconsolidated subsidiaries

 

(18

)

(1

)

108

 

(10

)

Merger-related charges

 

1,572

 

 

1,572

 

 

Operating income

 

$

1,383

 

$

4,953

 

$

599

 

$

1,950

 

EBITDA

 

$

2,291

 

$

5,814

 

$

2,420

 

$

3,924

 

EBITDA margin

 

4.4

%

13.4

%

2.5

%

5.3

%

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Revenue

 

$

27,028

 

$

25,687

 

$

45,324

 

$

40,991

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

11,312

 

9,618

 

20,355

 

17,301

 

Operating, administrative and other

 

11,947

 

9,755

 

23,265

 

19,069

 

Depreciation and amortization

 

752

 

534

 

1,488

 

1,522

 

Equity income from unconsolidated subsidiaries

 

(166

)

(62

)

(129

)

(528

)

Operating income

 

$

3,183

 

$

5,842

 

$

345

 

$

3,627

 

EBITDA

 

$

3,935

 

$

6,376

 

$

1,833

 

$

5,149

 

EBITDA margin

 

14.6

%

24.8

%

4.0

%

12.6

%

 

 

 

 

 

 

 

 

 

 

Total operating income

 

$

25,392

 

$

29,263

 

$

36,234

 

$

32,177

 

 

 

 

 

 

 

 

 

 

 

Total EBITDA

 

$

31,721

 

$

33,374

 

$

48,734

 

$

43,880

 

 

EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization of intangible assets.  Management believes that the presentation of EBITDA will enhance a reader’s understanding of the Company’s operating performance.  EBITDA is also a measure used by senior management to evaluate the performance of the Company’s various lines of business and for other required or discretionary purposes, such as the use of EBITDA as a significant component when measuring performance under the Company’s employee incentive programs.  Additionally, many of the Company’s debt covenants are based upon a measure similar to EBITDA.  EBITDA should not be considered as an alternative to (i) operating income determined in accordance with accounting principles generally accepted in the United States, or (ii) operating cash flow determined in accordance with accounting principles generally accepted in the United States.  The Company’s calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.

 

23



 

            EBITDA is calculated as follows (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Americas

 

 

 

 

 

 

 

 

 

Operating income

 

$

20,826

 

$

18,468

 

$

35,290

 

$

26,600

 

Add: Depreciation and amortization

 

4,669

 

2,716

 

9,191

 

8,207

 

EBITDA

 

$

25,495

 

$

21,184

 

$

44,481

 

$

34,807

 

 

 

 

 

 

 

 

 

 

 

EMEA

 

 

 

 

 

 

 

 

 

Operating income

 

$

1,383

 

$

4,953

 

$

599

 

$

1,950

 

Add: Depreciation and amortization

 

908

 

861

 

1,821

 

1,974

 

EBITDA

 

$

2,291

 

$

5,814

 

$

2,420

 

$

3,924

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Operating income

 

$

3,183

 

$

5,842

 

$

345

 

$

3,627

 

Add: Depreciation and amortization

 

752

 

534

 

1,488

 

1,522

 

EBITDA

 

$

3,935

 

$

6,376

 

$

1,833

 

$

5,149

 

 

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

 

Americas

 

            Revenue increased by $26.6 million or 12.3% for the three months ended June 30, 2003 as compared to the three months ended June 30, 2002 primarily driven by significantly higher sales transaction revenue as well as increased appraisal fees.  The sales transaction revenue increase was due to an increased number of transactions and a higher average value per transaction.  Appraisal fees increased as a result of more producers added in key market areas.  Cost of services increased by $17.3 million or 16.7% for the three months ended June 30, 2003 as compared to the three months ended June 30, 2002 primarily driven by higher sales transaction revenue and appraisal fees. Cost of services as a percentage of revenue increased from 48.0 % for the second quarter of the prior year to 49.9% for the second quarter of the current year. Operating, administrative and other expenses increased $5.4 million or 5.8% mainly due to higher bonuses and payroll related costs partially offset by foreign currency transaction gains resulting from the weakened U.S. dollar.  Included in the 2003 bonus amount was an accrual for a one-time performance award of approximately $5.0 million.

 

EMEA

 

            Revenue increased by $8.9 million or 20.4% for the three months ended June 30, 2003 as compared to the three months ended June 30, 2002.  This was mainly driven by higher sales and lease transaction revenue as well as consultation fees across Europe.  These revenue increases were partially offset by reduced revenue in the Company's French investment management business due to the timing of selected transactions coupled with business start-up costs, which are not expected to have a full year negative impact. Cost of services increased $5.3 million or 34.1% as a result of higher producer compensation expense due to new hires and increased payroll related costs, including pension and insurance expenses, and in part due to the improved results. Operating, administrative and other expenses increased by $5.5 million or 25.2% mainly due to higher payroll related expenses.

 

Asia Pacific

 

            Revenue increased by $1.3 million or 5.2% for the three months ended June 30, 2003 as compared to the three months ended June 30, 2002.  The increase was primarily driven by an overall increase in revenue in Australia and New Zealand.  These revenue increases were partially offset by reduced revenue in the Company's Japanese investment management business due to the timing of selected transactions, which is not expected to have a full year negative impact. Cost of services increased by $1.7 million or 17.6% primarily from higher producer compensation expense due to increased headcount in Australia and New Zealand. Operating, administrative and other expenses increased by $2.2 million or 22.5% primarily due to an increased accrual for long term incentives in Australia and New Zealand.

 

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

 

Americas

 

            Revenue increased by $48.0 million or 12.2% for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002 primarily driven by significantly higher sales transaction revenue due to an increased number of transactions and a higher average value per transaction.  Cost of services increased by $34.7 million or 19.1% for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002 due to higher sales

 

24



 

transaction revenue as well as increased payroll related costs, primarily insurance. As a result of the latter, cost of services as a percentage of revenue increased from 45.9 % for the six months ended June 30, 2002 to 48.8% for the six months ended June 30, 2003. Operating, administrative and other expenses increased $6.2 million or 3.4% due to higher bonus and payroll related costs partially offset by foreign currency transaction gains resulting from the weakened U.S. dollar.  Included in the 2003 bonus amount was an accrual for a one-time performance award of approximately $5.0 million.

 

EMEA

 

            Revenue increased by $24.3 million or 33.1% for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002.  This was mainly driven by higher sales and lease transaction revenue across Europe.  These revenue increases were partially offset by reduced revenue in the Company's French investment management business due to the timing of selected transactions coupled with business start-up costs, which are not expected to have a full year negative impact. Cost of services increased $11.1 million or 37.9% as a result of higher producer compensation expense due to new hires and increased payroll related costs, including pension and insurance expenses, and in part due to the improved results.  Operating, administrative and other expenses increased by $13.0 million or 32.3% due to higher bonus, payroll related and consulting expenses.

 

Asia Pacific

 

            Revenue increased by $4.3 million or 10.6% for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002.  The increase was primarily driven by an overall increase in revenue in Australia and New Zealand.  These revenue increases were partially offset by reduced revenue in the Company's Japanese investment management business due to the timing of selected transactions, which is not expected to have a full year negative impact. Cost of services increased by $3.1 million or 17.7% mainly attributable to higher producer compensation expense due to increased headcount in Australia and New Zealand. Operating, administrative and other expenses increased by $4.2 million or 22.0% primarily due to an increased accrual for long term incentives in Australia and New Zealand.

 

Liquidity and Capital Resources

 

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

 

            In conjunction with and immediately prior to the Insignia Acquisition, Island Fund I, L.L.C. (Island), a Delaware limited liability company, which is affiliated with Andrew L. Farkas, Insignia’s former Chairman and Chief Executive Officer, and certain of Insignia’s other former officers, completed the purchase of certain real estate investment assets of Insignia, pursuant to a Purchase Agreement, dated as of May 28, 2003 (the Island Purchase Agreement), by and among Insignia, the Company, CBRE, the Merger Sub and Island.

 

            Pursuant to the terms of the Insignia Acquisition Agreement, as a result of the completion of the Insignia Acquisition, the sale pursuant to the Island Purchase Agreement prior to the Insignia Acquisition and the satisfaction of certain conditions set forth in the Insignia Acquisition Agreement, (i) each issued and outstanding share of Insignia Common Stock (other than treasury shares), par value $0.01 per share, was converted into the right to receive $11.156 in cash, without interest (the Insignia Common Stock Merger Consideration), (ii) each issued and outstanding share of Insignia’s Series A Preferred Stock, par value $0.01 per share, and Series B Preferred Stock, par value $0.01 per share, was converted into the right to receive $100.00 per share, plus accrued and unpaid dividends, (iii) all outstanding warrants and options other than as described below, whether vested or unvested, were canceled and represented the right to receive a cash payment, without interest, equal to the excess, if any, of the Insignia Common Stock Merger Consideration over the per share exercise price of the option or warrant, multiplied by the number of shares of Insignia Common Stock subject to the option or warrant less any applicable withholding taxes, and (iv) outstanding options to purchase Insignia Common Stock granted pursuant to Insignia’s 1998 Stock Investment Plan, whether vested or unvested, were canceled and represented the right to receive a cash payment, without interest, equal to the excess, if any, of the higher of (x) the Insignia Common Stock Merger Consideration, or (y) the highest final sale price per share of the Insignia Common Stock as reported on the New York Stock Exchange (NYSE) at any time during the 60-day period preceding the closing of the Insignia Acquisition (which was $11.20), over the exercise price of the options, multiplied by the number of shares of Insignia Common Stock subject to the options, less any applicable withholding taxes.  Following the Insignia Acquisition, the Insignia Common Stock was delisted from the NYSE and deregistered under the Securities

 

25



 

Exchange Act of 1934, as amended.

 

            The funding to complete the Insignia Acquisition, as well as the refinancing of substantially all of the outstanding indebtedness of Insignia, was obtained through (i) the sale of 6,587,135 shares of the Company’s Class B Common Stock, par value $0.01 per share, to Blum Strategic Partners, L.P., a Delaware limited partnership, Blum Strategic Partners II, L.P., a Delaware limited partnership and Blum Strategic Partners II GmbH & Co. KG, a German limited partnership, for an aggregate cash purchase price of $105,394,160, (ii) the sale of 227,865 shares of the Company’s Class A Common Stock, par value $.01 per share, to DLJ Investment Partners, L.P., a Delaware limited partnership, DLJ Investment Partners II, L.P., a Delaware limited partnership, DLJIP II Holdings, L.P., a Delaware limited partnership, for an aggregate cash purchase price of $3,645,840, (iii) the sale of 625,000 shares of the Company’s Class A Common Stock to California Public Employees’ Retirement System for an aggregate cash purchase price of $10,000,000, (iv) the sale of 60,000 shares of the Company’s Class B Common Stock to Frederic V. Malek for an aggregate cash purchase price of $960,000, (v) the release from escrow of the net proceeds from the offering by CBRE Escrow, Inc. (CBRE Escrow), a wholly owned subsidiary of CBRE that merged with and into CBRE in connection with the Insignia Acquisition, of $200.0 million of 9¾% Senior Notes due May 15, 2010 (the 9¾% Senior Notes), which Senior Notes had been issued and sold by CB Escrow on May 22, 2003, (vi) $75.0 million of term loan borrowings under the Amended and Restated Credit Agreement dated as of May 22, 2003, by and among CBRE, the lenders named therein and Credit Suisse First Boston (CSFB) as Administrative Agent and Collateral Agent and (vii) $36,870,229.61 of cash proceeds from the completion of the sale to Island.

 

            The Company believes it can satisfy its non-acquisition obligations, as well as its working capital requirements and funding of investments, with internally generated cash flow, borrowings under the revolving line of credit with CSFB and other lenders or any replacement credit facilities.  In the near term, further material acquisitions, if any, that necessitate cash will require new sources of capital such as an expansion of the revolving credit facility and /or issuing additional debt or equity. The Company anticipates that its existing sources of liquidity, including cash flow from operations, will be sufficient to meet its anticipated non-acquisition cash requirements for the foreseeable future, but at a minimum for the next twelve months.

 

            Net cash used in operating activities totaled $74.6 million for the six months ended June 30, 2003, an increase of $34.4 million compared to the six months ended June 30, 2002.  This increase was primarily due to the timing of payments to vendors and taxing authorities, as well as increased receivables as a result of higher sales transaction revenue.

 

            Net cash provided by investing activities totaled $2.4 million for the six months ended June 30, 2003 compared to net cash used in investing activities of $16.2 million in the same period of the prior year. This decrease was primarily due to larger landlord rent concessions as well as the payment of expenses related to the 2001 Merger in the prior year.

 

            Net cash provided by financing activities totaled $14.2 million for the six months ended June 30, 2003 compared to net cash provided by financing activities of $17.9 million for the six months ended June 30,2002.  This decrease was mainly attributable to a decline in net borrowings under the revolving credit facility, partially offset by higher Euro line borrowings for the six months ending June 30, 2003 as compared to the prior year.

 

            The Company issued $200.0 million in aggregate principal amount of 9¾% Senior Notes due May 15, 2010 which were issued and sold by CBRE Escrow on May 22, 2003 and assumed by CBRE in connection with the Insignia Acquisition.  The 9¾% Senior Notes are unsecured obligations, senior to all current and future unsecured indebtedness, but subordinated to all current and future secured indebtedness of the Company. The 9¾% Senior Notes are jointly and severally guaranteed on a senior subordinated basis by the Company and its domestic subsidiaries. Interest accrues at a rate of 9¾% per annum and is payable semi-annually in arrears on May 15 and November 15, commencing on November 15, 2003.  The 9¾% Senior Notes are redeemable at the Company’s option, in whole or in part, on or after May 15, 2007 at 104.875% of par on that date and at declining prices thereafter.  In addition, before May 15, 2006, the Company may redeem up to 35.0% of the originally issued amount of the 9¾% Senior Notes at 109 ¾% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings. In the event of a change of control, the Company is obligated to make an offer to purchase the 9¾% Senior Notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest.  The amount of the 9¾% Senior Notes included in the accompanying consolidated balance sheets was $200.0 million as of June 30, 2003.

 

            In accordance with the terms of the debt offering, the proceeds from the sale of the 9¾% Senior Notes were placed in escrow until the close of the Insignia Acquisition.  Accordingly, the Company had $200.0 million of cash held in

 

26



 

 

escrow included in the accompanying consolidated balance sheet as of June 30, 2003.

 

            In connection with the Insignia Acquisition, the Company entered into an amended and restated credit agreement with CSFB and other lenders. The amendment and restatement modified certain terms of the Company’s existing senior secured credit facilities (the Credit Facility).  The Credit Facility was, and the amended and restated Credit Facility continues to be, jointly and severally guaranteed by the Company and its domestic subsidiaries and secured by substantially all of their assets.  The amended and restated Credit Facility includes a Tranche A term facility of $50.0 million (which was fully drawn in connection with the 2001 Merger), maturing on July 20, 2007; a Tranche B term facility of $260.0 million ($185.0 million of which was drawn in connection with the 2001 Merger), maturing on July 18, 2008; and a revolving line of credit of $90.0 million, including revolving credit loans, letters of credit and a swingline loan facility, maturing on July 20, 2007.  After the amendment and restatement, borrowings under the Tranche A and revolving facility bear interest at varying rates based on the Company’s option, at either the applicable LIBOR plus 3.00% to 3.75% or the alternate base rate plus 2.00% to 2.75%, in both cases as determined by reference to the Company’s ratio of total debt less available cash to EBITDA, which are defined in the amended and restated credit agreement.  After the amendment and restatement, borrowings under the Tranche B facility bear interest at varying rates based on the Company’s option at either the applicable LIBOR plus 4.25% or the alternate base rate plus 3.25%.  The alternate base rate is the higher of (1) CSFB’s prime rate or (2) the Federal Funds Effective Rate plus one-half of one percent.

 

            The Tranche A facility will be repaid by July 20, 2007 through quarterly principal payments over six years, which total $7.5 million each year through June 30, 2003 and $8.75 million each year thereafter through July 20, 2007. The Tranche B facility required quarterly principal payments of approximately $0.5 million, and after the amendment and restatement requires quarterly principal payments of approximately $0.65 million, with the remaining outstanding principal due on July 18, 2008. The revolving line of credit requires the repayment of any outstanding balance for a period of 45 consecutive days commencing on any day in the month of December of each year as determined by the Company. The Company repaid its revolving credit facility as of November 5, 2002 and at June 30, 2003 had an outstanding balance on the line of credit of $11.3 million. The total amount outstanding under the Credit Facility included in senior secured term loans, current maturities of long-term debt and short-term borrowings in the accompanying consolidated balance sheets was $227.6 million and $221.0 million as of June 30, 2003 and December 31, 2002, respectively.

 

            The Company issued $229.0 million in aggregate principal amount of 11 ¼% Senior Subordinated Notes due June 15, 2011 (the Notes), which were issued and sold by Blum CB Corp. for approximately $225.6 million, net of discount, on June 7, 2001 and assumed by CBRE in connection with the 2001 Merger.  The Notes are jointly and severally guaranteed on a senior subordinated basis by the Company and its domestic subsidiaries.  The Notes require semi-annual payments of interest in arrears on June 15 and December 15, having commenced on December 15, 2001, and are redeemable in whole or in part on or after June 15, 2006 at 105.625% of par on that date and at declining prices thereafter.  In addition, before June 15, 2004, the Company may redeem up to 35.0% of the originally issued amount of the Notes at 111 ¼% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings.  In the event of a change of control, the Company is obligated to make an offer to purchase the Notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest.  The amount of the Notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $226.1 million and $225.9 million as of June 30, 2003 and December 31, 2002, respectively.

 

            In connection with the 2001 Merger, the Company issued an aggregate principal amount of $65.0 million of 16.0% Senior Notes due on July 20, 2011 (the Senior Notes).  The Senior Notes are unsecured obligations, senior to all current and future unsecured indebtedness, but subordinated to all current and future secured indebtedness of the Company.  Interest accrues at a rate of 16.0% per year and is payable quarterly in arrears.  Interest may be paid in kind to the extent CBRE’s ability to pay cash dividends is restricted by the terms of the Credit Facility.  Additionally, interest in excess of 12.0% may, at the Company’s option, be paid in kind through July 2006.  The Company elected to pay in kind interest in excess of 12.0%, or 4.0%, that was payable on April 20, 2002, July 20, 2002, October 20, 2002, January 20, 2003 and April 20, 2003.  The Senior Notes are redeemable at the Company’s option, in whole or in part, at 116.0% of par commencing on July 20, 2001 and at declining prices thereafter. As of June 30, 2003, the redemption price was 112.8% of par.  In the event of a change in control, the Company is obligated to make an offer to purchase all of the outstanding Senior Notes at 101.0% of par. The total amount of the Senior Notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $63.3 million and $61.9 million as of June 30, 2003 and December 31, 2002, respectively.

 

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            The Senior Notes are solely the Company’s obligation to repay.  CBRE has neither guaranteed nor pledged any of its assets as collateral for the Senior Notes, and is not obligated to provide cash flow to the Company for repayment of these Senior Notes.  However, the Company has no substantive assets or operations other than its investment in CBRE to meet any required principal and interest payments on the Senior Notes.  The Company will depend on CBRE’s cash flows to fund principal and interest payments as they come due.

 

            The Notes, the Credit Facility, the Senior Notes and the 9¾% Senior Notes all contain numerous restrictive covenants that, among other things, limit the Company’s ability to incur additional indebtedness, pay dividends or distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, engage in transactions with affiliates, issue subsidiary equity and enter into consolidations or mergers.  The Credit Facility required, and after the amendment and restatement continues to require, the Company to maintain a minimum coverage ratio of interest and certain fixed charges and a maximum leverage and senior leverage ratio of earnings before interest, taxes, depreciation and amortization to funded debt.  The Credit Facility required, and after the amendment and restatement continues to require, the Company to pay a facility fee based on the total amount of the unused commitment.

 

            On February 23, 2003, Moody’s Investor Service confirmed the ratings of the Company’s senior secured term loans and Senior Subordinated Notes at B1 and B3, respectively.  On May 1, 2003, Moody’s assigned the rating of B1 to the Company’s $200.0 million 9¾% Senior Notes and confirmed the ratings of the senior secured term loans at B1.  On April 3, 2003, Standard and Poor’s Ratings Service downgraded the Company’s senior secured term loans and Senior Subordinated Notes from BB- to B+ and B to B-, respectively.  On April 14, 2003, Standard and Poor’s assigned the rating B+ to the Company’s 9¾% Senior Notes.  Neither the Moody’s nor the Standard and Poor’s ratings impact the Company’s ability to borrow or affect the Company’s interest rates for the senior secured term loans.

 

            A subsidiary of the Company has had a credit agreement with Residential Funding Corporation (RFC) since 2001 for the purpose of funding mortgage loans that will be resold.  On December 16, 2002, the Company entered into the Third Amended and Restated Warehousing Credit and Security Agreement effective December 20, 2002.  The agreement provides for a revolving line of credit of $200.0 million, bears interest at the lower of one-month LIBOR or 2.0% (RFC Base Rate) plus 1.0% and expires on August 31, 2003. On March 28, 2003, the Company was notified that effective May 1, 2003, the RFC Base Rate would be lowered to the greater of one-month LIBOR or 1.5%. On June 25, 2003, the agreement was further modified to provide a temporary revolving line of credit increase of $200.0 million that resulted in a total line of credit equaling $400.0 million, which expires on August 30, 2003 and to change the RFC Base Rate to one-month LIBOR plus 1.0%.

 

            During the quarter ended June 30, 2003, the Company had a maximum of $178.7 million revolving line of credit principal outstanding with RFC.  At June 30, 2003 and December 31, 2002, respectively, the Company had a $138.2 million and a $63.1 million warehouse line of credit outstanding, which are included in short-term borrowings in the accompanying consolidated balance sheets.  Additionally, the Company had a $138.2 million and a $63.1 million warehouse receivable, which are also included in the accompanying consolidated balance sheets as of June 30, 2003 and December 31, 2002, respectively.

 

            A subsidiary of the Company has a credit agreement with JP Morgan Chase.  The credit agreement provides for a non-recourse revolving line of credit of up to $20.0 million, bears interest at 1.0% in excess of the bank’s cost of funds and expires on May 28, 2004.  At June 30, 2003 and December 31, 2002 the Company had no revolving line of credit principal outstanding with JP Morgan Chase.

 

            During 2001, the Company incurred $37.2 million of non-recourse debt through a joint venture.  In June 2003, the maturity date on this non-recourse debt was extended to June 24, 2004.  At June 30, 2003 and December 31, 2002, respectively, the Company had $39.3 million and $40.0 million of non-recourse debt outstanding, which is included in short-term borrowings in the accompanying consolidated balance sheets.

 

Derivatives and Hedging Activities

 

            The Company applies Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” when accounting for derivatives. In the normal course of business, the Company sometimes utilizes derivative financial instruments in the form of foreign currency exchange forward contracts to mitigate foreign currency exchange exposure resulting from intercompany loans. The Company does not engage in any speculative activities with respect to foreign currency. At June 30, 2003, the Company had foreign currency exchange forward contracts with an aggregate notional amount of $29.0 million, which mature on various dates through December 31, 2003. The net impact on the Company's earnings for the three and six months ending June 30, 2003 resulting from the unrealized gains and/or losses on these foreign currency exchange forward contracts was not significant.

 

Litigation

 

            The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. 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.

 

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Application of Critical Accounting Policies

 

            The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect reported amounts.  The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable.  Actual results may differ from those estimates under different assumptions or conditions.  The Company believes that the following critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of its consolidated financial statements:

 

Revenue Recognition

 

            The Company records real estate commissions on sales 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. A typical commission agreement provides that the Company earns a portion of the lease commission upon the execution of the lease agreement by the tenant, while the remaining portion(s) of the lease commission is earned at a later date, usually upon tenant occupancy.  The existence of any significant future contingencies will result in the delay of recognition of revenue until such contingencies are satisfied.  For example, if the Company does not earn all or a portion of the lease commission until the tenant pays their first month’s rent and the lease agreement provides the tenant with a free rent period, the Company delays revenue recognition until cash rent is paid by the tenant.  Investment management and property 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 transaction, while loan servicing fees are recorded to revenue as monthly principal and interest payments are collected from mortgagors.  Other commissions, consulting fees and referral fees are recorded as income at the time the related services have been performed unless significant future contingencies exist.

 

            In establishing the appropriate provisions for trade receivables, the Company makes assumptions with respect to their future collectibility.  The Company’s assumptions are based on an individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivables balances.  In addition to these individual assessments, in general, outstanding trade accounts receivable amounts that are greater than 180 days are fully provided for.

 

Principles of Consolidation

 

            The accompanying consolidated financial statements include the accounts of CBRE Holding, Inc. (the Company) and majority-owned and controlled subsidiaries.  The equity attributable to minority shareholders’ interests in subsidiaries is shown separately in the accompanying consolidated 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 under the equity method.  Accordingly, the Company’s share of the earnings of these equity-method basis companies is included in consolidated net income.  All other investments held on a long-term basis are valued at cost less any impairment in value.

 

Goodwill and Other Intangible Assets

 

            Goodwill represents the excess of the purchase price paid by the Company over the fair value of the tangible and intangible assets and liabilities of CBRE at July 20, 2001, the date of the 2001 Merger.  Other intangible assets include a trademark, which was separately identified as a result of the 2001 Merger.  The trademark is not being amortized and has an indefinite estimated life.  The remaining other intangible assets represent management contracts and loan servicing rights and are amortized on a straight-line basis over estimated useful lives ranging up to ten years.

 

            The Company fully adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002.  This statement requires the Company to perform at least an annual assessment of impairment of goodwill and other intangible assets deemed to have indefinite useful lives based on assumptions and estimates of fair value and future cash flow information.  The Company engages a third-party valuation firm to perform an annual assessment of its goodwill and other intangible assets deemed to have indefinite lives for impairment as of the beginning of the fourth quarter of each year.  The Company also assesses its goodwill and other intangible assets deemed to have indefinite useful lives for

 

 

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impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows.

 

New Accounting Pronouncements

 

            In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” which is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.”  This interpretation addresses consolidation of entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks.  The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests and results of operations of a VIE need to be consolidated with its primary beneficiary.  A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the VIE’s expected residual returns or if the VIE does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties.  For VIEs in which a significant (but not majority) variable interest is held, certain disclosures are required.  The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003.  The consolidation requirements apply to existing VIEs in the first fiscal year or interim period beginning after June 15, 2003.  Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the VIE was established.  The adoption of this interpretation is not expected to have a material impact on the Company’s financial position or results of operations.

 

            In April, 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is applied prospectively and is effective for contracts entered into or modified after June 30, 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations.

 

Forward-Looking Statements

 

            Portions of this Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of the ‘‘safe harbor’’ provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements, which are generally identified by the use of terms such as “will”, “expected” or similar expressions, involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this Form 10-Q. Any forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in its expectations or results or any change in events.  Factors that could cause results to differ materially include, but are not limited to: commercial real estate vacancy levels; employment conditions and their effect on vacancy rates; property values; rental rates; any general economic recession domestically or internationally; and general conditions of financial liquidity for real estate transactions.

 

ITEM 3.                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

            The Company’s exposure to market risk consists of foreign currency exchange rate fluctuations related to international operations and changes in interest rates on debt obligations.

 

            Approximately 29% of the Company’s business is transacted in local currencies of foreign countries. The Company attempts to manage its exposure primarily by balancing monetary assets and liabilities, and maintaining cash positions only at levels necessary for operating purposes. The Company routinely monitors its transaction exposure to currency exchange rate changes and sometimes enters into foreign currency exchange forward and option contracts to limit its exposure, as approriate. The Company does not engage in any speculative activities with respect to foreign currency. At June 30, 2003, the Company had foreign currency exchange forward contracts with an aggregate notional amount of $29.0 million, which mature on various dates through December 31, 2003. The net impact on the Company's earnings for the three and six months ending June 30, 2003 resulting from the unrealized gains and/or losses on these foreign currency exchange forward contracts was not significant.

 

            The Company manages its interest expense by using a combination of fixed and variable rate debt. The Company utilizes sensitivity analyses to assess the potential effect of its variable rate debt. If interest rates were to increase by 40 basis points, which would comprise approximately 10% of the weighted average variable rates at June 30, 2003, the net impact would be a decrease of $0.8 million on pre-tax income and cash provided by operating activities for the six months ending June 30, 2003.

 

ITEM 4.  DISCLOSURE CONTROLS AND PROCEDURES

 

            As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures.   Disclosure controls and procedures are designed to ensure that information required to be disclosed in the periodic reports filed or submitted under the Securities and Exchange Act of 1934 is recorded,

 

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processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this report. No change in the internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is likely to materially affect, the internal control over financial reporting.

 

 

PART II.  OTHER INFORMATION

 

ITEM 1.                 LEGAL PROCEEDINGS

 

                                    The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. Management believes that any liability that may result from the disposition of these lawsuits will not have a material effect on the Company’s consolidated financial position or results of operations.

 

ITEM 6.                 EXHIBITS AND REPORTS ON FORM 8-K

 

(a)       Exhibits

 

Exhibit Number

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes — Oxley Act of 2003.

31.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes — Oxley Act of 2003.

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Certifications by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes — Oxley Act of 2003.

 

(b)       Reports on Form 8-K

 

            The registrant filed a Current Report on Form 8-K on May 21, 2003 with regard to the Company’s conference call on May 15, 2003 discussing first quarter 2003 operating results.

 

            The registrant filed a Current Report on Form 8-K on May 14, 2003 furnishing a press release issued on May 14, 2003 discussing the Company’s operating results for the first quarter of 2003.

 

            The registrant filed a Current Report on Form 8-K on April 30, 2003 to disclose information that was made available to certain individuals in connection with the Company’s acquisition of Insignia.

 

 

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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.

 

 

CBRE HOLDING, INC.

 

 

Date:  August 14, 2003

/s/ KENNETH J. KAY

 

Kenneth J. Kay

 

Chief Financial Officer

 

 

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