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)

 

 

 

 

                             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

 

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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