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 September 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

 

 

(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 October 31, 2003 was 2,591,358 and 19,271,948 respectively.

 

 



 

FORM 10-Q

 

September 30, 2003

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

 

 

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

 

 

 

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

 

 

 

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

 

 

 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2003 (Unaudited)

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

Item 2.

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

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 4.

Disclosure Controls and Procedures

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

 

Item 2.

Changes in Securities and Use of Proceeds

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

Signature

 

 

2



 

CBRE HOLDING, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

September 30,
2003

 

December 31,
2002

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

85,494

 

$

79,701

 

Restricted cash

 

17,912

 

 

Receivables, less allowance for doubtful accounts of $17,720 and $10,892 at September 30, 2003 and December 31, 2002, respectively

 

250,608

 

166,213

 

Warehouse receivable

 

135,820

 

63,140

 

Prepaid expenses

 

25,222

 

9,748

 

Deferred tax assets, net

 

74,748

 

18,723

 

Other current assets

 

17,731

 

8,415

 

Total current assets

 

607,535

 

345,940

 

 

 

 

 

 

 

Property and equipment, net

 

110,705

 

66,634

 

Goodwill

 

793,251

 

577,137

 

Other intangible assets, net of accumulated amortization of $42,756 and $7,739 at September 30, 2003 and December 31, 2002, respectively

 

153,790

 

91,082

 

Deferred compensation assets

 

70,077

 

63,642

 

Investments in and advances to unconsolidated subsidiaries

 

64,482

 

50,208

 

Deferred tax assets, net

 

26,227

 

36,376

 

Other assets

 

140,957

 

93,857

 

Total assets

 

$

1,967,024

 

$

1,324,876

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

137,295

 

$

102,415

 

Compensation and employee benefits payable

 

152,408

 

63,734

 

Accrued bonus and profit sharing

 

101,842

 

103,858

 

Income taxes payable

 

 

15,451

 

Short-term borrowings:

 

 

 

 

 

Warehouse line of credit

 

135,820

 

63,140

 

Other

 

27,914

 

47,925

 

Total short-term borrowings

 

163,734

 

111,065

 

Current maturities of long-term debt

 

11,777

 

10,711

 

Total current liabilities

 

567,056

 

407,234

 

 

 

 

 

 

 

Long-Term Debt:

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount of $2,886 and $3,057 at September 30, 2003 and December 31, 2002, respectively

 

226,114

 

225,943

 

Senior secured term loans

 

277,113

 

211,000

 

9¾% senior notes

 

200,000

 

 

16% senior notes, net of unamortized discount of $4,899 and $5,107 at September 30, 2003 and December 31, 2002, respectively

 

63,416

 

61,863

 

Other long-term debt

 

52,733

 

12,327

 

Total long-term debt

 

819,376

 

511,133

 

Deferred compensation liability

 

125,465

 

106,252

 

Other liabilities

 

99,725

 

43,301

 

Total liabilities

 

1,611,622

 

1,067,920

 

Minority interest

 

6,706

 

5,615

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Class A common stock; $0.01 par value; 75,000,000 shares authorized; 2,698,441 and 1,793,254 shares issued and outstanding (including treasury shares) at September 30, 2003 and December 31, 2002, respectively

 

27

 

17

 

Class B common stock; $0.01 par value; 25,000,000 shares authorized; 19,271,948 and 12,624,813 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively

 

193

 

127

 

Additional paid-in capital

 

361,400

 

240,574

 

Notes receivable from sale of stock

 

(4,705

)

(4,800

)

Accumulated earnings

 

11,533

 

36,153

 

Accumulated other comprehensive loss

 

(17,724

)

(18,998

)

Treasury stock at cost, 128,684 and 110,174 shares at September 30, 2003 and December 31, 2002, respectively

 

(2,028

)

(1,732

)

Total stockholders’ equity

 

348,696

 

251,341

 

Total liabilities and stockholders’ equity

 

$

1,967,024

 

$

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

423,376

 

$

284,928

 

$

1,008,817

 

$

793,811

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

208,198

 

135,670

 

484,863

 

363,506

 

Operating, administrative and other

 

180,298

 

124,470

 

443,894

 

364,676

 

Depreciation and amortization

 

41,071

 

6,404

 

53,571

 

18,107

 

Equity income from unconsolidated subsidiaries

 

(2,318

)

(2,778

)

(9,182

)

(6,422

)

Merger-related charges

 

16,485

 

 

19,795

 

50

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(20,358

)

21,162

 

15,876

 

53,894

 

Interest income

 

1,788

 

1,275

 

3,564

 

2,673

 

Interest expense

 

28,255

 

15,420

 

59,519

 

46,341

 

 

 

 

 

 

 

 

 

 

 

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

 

(46,825

)

7,017

 

(40,079

)

10,226

 

(Benefit) provision for income taxes

 

(18,380

)

5,136

 

(15,459

)

6,596

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(28,445

)

$

1,881

 

$

(24,620

)

$

3,630

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) income per share

 

$

(1.37

)

$

0.13

 

$

(1.45

)

$

0.24

 

 

 

 

 

 

 

 

 

 

 

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

 

20,743,011

 

15,016,044

 

16,957,494

 

15,033,640

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) income per share

 

$

(1.37

)

$

0.12

 

$

(1.45

)

$

0.24

 

 

 

 

 

 

 

 

 

 

 

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

 

20,743,011

 

15,225,788

 

16,957,494

 

15,216,740

 

 

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)

 

 

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net (loss) income

 

$

(24,620

)

$

3,630

 

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

 

 

 

 

 

Depreciation and amortization

 

53,571

 

18,107

 

Amortization of deferred financing costs

 

3,336

 

2,499

 

Deferred compensation plan deferrals

 

7,836

 

9,224

 

Gain on sale of servicing rights and other assets

 

(3,417

)

(5,026

)

Equity income from unconsolidated subsidiaries

 

(9,182

)

(6,422

)

Provision for doubtful accounts

 

3,598

 

2,923

 

Decrease in receivables

 

23,253

 

20,020

 

(Increase) decrease in deferred compensation plan assets

 

(6,435

)

9,919

 

Increase in prepaid expenses and other assets

 

(14,237

)

(9,142

)

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

 

(45,269

)

(40,481

)

(Decrease) increase in accounts payable and accrued expenses

 

(22,089

)

2,679

 

Decrease in income taxes payable

 

(29,134

)

(10,250

)

Decrease in other liabilities

 

(1,540

)

(19,409

)

Other operating activities, net

 

(6,385

)

2,759

 

Net cash used in operating activities

 

(70,714

)

(18,970

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures, net of concessions received

 

(8,185

)

(8,281

)

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

 

(243,847

)

(14,529

)

Other investing activities, net

 

(652

)

6,348

 

Net cash used in investing activities

 

(252,684

)

(16,462

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from revolver and swingline credit facility

 

152,850

 

214,250

 

Repayment of revolver and swingline credit facility

 

(152,850

)

(207,250

)

Proceeds from senior secured term loans

 

75,000

 

 

Repayment of senior secured term loans

 

(7,513

)

(7,014

)

Repayment of notes payable

 

(43,000

)

 

Proceeds from 9 3/4% senior notes

 

200,000

 

 

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

 

3,732

 

(1,376

)

Proceeds from issuance of common stock

 

120,580

 

180

 

Payment of deferred financing fees

 

(19,774

)

(443

)

Other financing activities, net

 

(527

)

(412

)

Net cash provided by (used in) financing activities

 

328,498

 

(2,065

)

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

5,100

 

(37,497

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

79,701

 

57,450

 

Effect of currency exchange rate changes on cash

 

693

 

(1,469

)

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

85,494

 

$

18,484

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

31,694

 

$

33,961

 

Income taxes, net of refunds

 

$

25,533

 

$

16,481

 

 

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

 

5



 

CBRE HOLDING, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other
comprehensive (loss) income

 

 

 

 

 

 

 

Class A
common
stock

 

Class B
common
stock

 

Additional
paid-in
capital

 

Notes
receivable
from sale
of stock

 

Accumulated
earnings (loss)

 

Minimum
pension
liability

 

Foreign
currency
translation

 

Treasury
stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

 

$

17

 

$

127

 

$

240,574

 

$

(4,800

)

$

36,153

 

$

(17,039

)

$

(1,959

)

$

(1,732

)

$

251,341

 

Net loss

 

 

 

 

 

(24,620

)

 

 

 

(24,620

)

Issuance of Class A common stock

 

10

 

 

14,297

 

(76

)

 

 

 

 

14,231

 

Issuance of Class B common stock

 

 

66

 

106,287

 

 

 

 

 

 

106,353

 

Issuance of deferred compensation stock fund units, net of cancellations

 

 

 

242

 

 

 

 

 

 

242

 

Net collection on notes receivable from sale of stock

 

 

 

 

171

 

 

 

 

 

171

 

Purchase of common stock

 

 

 

 

 

 

 

 

(296

)

(296

)

Foreign currency translation gain

 

 

 

 

 

 

 

1,274

 

 

1,274

 

Balance, September 30, 2003

 

$

27

 

$

193

 

$

361,400

 

$

(4,705

)

$

11,533

 

$

(17,039

)

$

(685

)

$

(2,028

)

$

348,696

 

 

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

 

6



 

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 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 2001 Merger).  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.              Insignia Acquisition

 

On July 23, 2003, pursuant to an Amended and Restated Agreement and Plan of Merger, dated May 28, 2003 (the Insignia Acquisition Agreement), by and among the Company, CBRE, Apple Acquisition Corp. (Apple Acquisition), a Delaware corporation and wholly owned subsidiary of CBRE, and Insignia Financial Group, Inc. (Insignia), Apple Acquisition was merged with and into Insignia (the Insignia Acquisition).  Insignia was the surviving corporation in the Insignia Acquisition and at the effective time of the Insignia Acquisition became a wholly owned subsidiary of CBRE.  The Company acquired Insignia to solidify its position as the market leader in the commercial real estate services industry.

 

In conjunction with and immediately prior to the Insignia Acquisition, Island Fund I LLC (Island), a Delaware limited liability company, which is affiliated with Andrew L. Farkas, Insignia’s former Chairman and Chief Executive Officer, and some of Insignia’s other former officers, completed the purchase of specified real estate investment assets of Insignia, pursuant to a Purchase Agreement, dated May 28, 2003 (the Island Purchase Agreement), by and among Insignia, the Company, CBRE, Apple Acquisition and Island.  A number of the real estate investment assets that were sold to Island required the consent of one or more third parties in order to transfer such assets.  Some of these third party consents were not obtained prior to the closing of the Insignia Acquisition.  As a result, the Company continues to hold these real estate investment assets pending the receipt of these third party consents.  While the Company holds these assets, it has generally agreed to provide Island with the economic benefits from these assets and Island generally has agreed to indemnify the Company with respect to any losses incurred in connection with continuing to hold these assets.

 

Pursuant to the terms of the Insignia Acquisition Agreement, (1) 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), (2) 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, (3) all outstanding warrants and options to acquire Insignia common stock 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 (4) 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 (a) 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 (b) 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

 

7



 

Insignia Acquisition, the Insignia Common Stock was delisted from the NYSE and deregistered under the Securities Exchange Act of 1934.

 

The funding to complete the Insignia Acquisition, as well as the refinancing of substantially all of the outstanding indebtedness of Insignia, was obtained through (a) 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, (b) 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 and DLJIP II Holdings, L.P., a Delaware limited partnership, for an aggregate cash purchase price of $3,645,840, (c) 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, (d) 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, (e) 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 the 9¾% Senior Notes due May 15, 2010 (see Note 11), which Senior Notes had been issued and sold by CBRE Escrow on May 22, 2003, (f) $75.0 million of term loan borrowings under the Amended and Restated Credit Agreement (see Notes 11 and 19), dated as of May 22, 2003, by and among CBRE, Credit Suisse First Boston (CSFB) as Administrative Agent and Collateral Agent, the other lenders named in the credit agreement, the Company and the guarantors named in the credit agreement and (g) $36,870,229.61 of cash proceeds from the completion of the sale to Island.

 

3.              Purchase Accounting

 

The aggregate preliminary purchase price for the acquisition of Insignia was approximately $325.9 million, which includes: (1) cash paid for shares of Insignia’s outstanding common stock, valued at $11.156 per share,  (2) $100.00 per share plus accrued and unpaid dividends paid to the owners of Insignia’s outstanding Series A preferred stock and Series B preferred stock, (3) cash payments to holders of Insignia’s vested and unvested warrants and options and (4) direct costs incurred in connection with the acquisition.

 

The preliminary purchase accounting adjustments related to the Insignia Acquisition have been recorded in the accompanying consolidated financial statements as of, and for periods subsequent to, July 23, 2003.  The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition.  The Company is in the process of obtaining third party valuations of certain intangible assets as well as finalizing the fair value of all other assets and liabilities as of the acquisition date.

 

Fair Value of Assets Acquired and Liabilities Assumed

At July 23, 2003

(Dollars in thousands)

 

Current assets

 

$

297,780

 

Property and equipment, net

 

41,589

 

Goodwill

 

211,996

 

Other intangible assets, net

 

93,971

 

Other assets

 

33,011

 

 

 

 

 

Total assets acquired

 

678,347

 

 

 

 

 

Current liabilities

 

176,546

 

Liabilities assumed in connection with the Insignia Acquisition

 

74,586

 

Notes payable

 

43,000

 

Noncurrent deferred tax liabilities, net

 

23,690

 

All other liabilities

 

34,604

 

 

 

 

 

Total liabilities assumed

 

352,426

 

 

 

 

 

Net assets acquired

 

$

325,921

 

 

8



 

The Insignia Acquisition gave rise to the consolidation and elimination of some Insignia duplicate facilities and Insignia redundant employees as well as the termination of certain contracts as a result of a change of control of Insignia.  As a result, the Company has accrued certain liabilities in accordance with Emerging Issues Task Force No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.”  These liabilities assumed in connection with the Insignia Acquisition consist of the following (dollars in thousands):

 

 

 

2003 Charge
to Goodwill

 

Utilized to
Date

 

To be
Utilized

 

 

 

 

 

 

 

 

 

Lease termination costs

 

$

26,488

 

$

 

$

26,488

 

Severance

 

29,363

 

6,454

 

22,909

 

Change of control payments

 

10,451

 

10,451

 

 

Costs associated with exiting contracts

 

8,284

 

7,259

 

1,025

 

 

 

$

74,586

 

$

24,164

 

$

50,422

 

 

4.              Basis of Preparation

 

The accompanying consolidated balance sheet as of September 30, 2003, the consolidated statements of operations for the three and nine months ended September 30, 2003 and the consolidated statement of cash flows for the nine months ended September 30, 2003 include the consolidated financial statements of Insignia from July 23, 2003, the date of the Insignia Acquisition, including all material adjustments required under the purchase method of accounting.  As such, the consolidated financial statements of the Company after the Insignia Acquisition are not directly comparable to the financial statements prior to the Insignia Acquisition.

 

Pro forma results of the Company, assuming the Insignia Acquisition had occurred as of January 1, 2002, are presented below. These pro forma results have been prepared for comparative purposes only and include certain adjustments, such as increased amortization expense as a result of intangible assets acquired in the Insignia Acquisition as well as higher interest expense as a result of debt acquired to finance the Insignia Acquisition. These pro forma results do not purport to be indicative of what operating results would have been, and may not be indicative of future operating results (in thousands, except per share amounts):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

462,004

 

$

434,827

 

$

1,327,570

 

$

1,197,508

 

Operating income

 

$

8,795

 

$

22,965

 

$

36,300

 

$

7,051

 

Net loss

 

$

(11,586

)

$

(1,072

)

$

(20,913

)

$

(36,371

)

Basic and diluted loss per share

 

$

(.51

)

$

(.05

)

$

(.93

)

$

(1.61

)

 

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 with the current period presentation.  The results of operations for the three and nine months ended September 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.

 

9



 

5.              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.  Initially, the consolidation requirements applied to existing VIEs in the first fiscal year or interim period beginning after June 15, 2003.  On October 9, 2003, the effective date of FIN 46 was deferred until the end of the first interim or annual period ending after December 15, 2003 for VIEs created on or before January 31, 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 has not had and 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 has not had a material impact on the Company’s financial position or results of operations.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company’s existing financial instruments effective July 1, 2003. On October 29, 2003, the FASB deferred indefinitely the provisions of paragraphs 9 and 10 and related guidance in the appendices of this pronouncement as they apply to mandatorily redeemable noncontrolling interests.  The adoption of the effective provisions of SFAS No. 150 have not had a material impact on the Company’s financial position or results of operations.

 

6.              Stock-Based Compensation

 

The Company continues to account for stock-based compensation under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25 and has not voluntarily changed to the fair value based method of accounting for stock-based compensation.  In accordance with APB No. 25, 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, “Accounting for Stock-Based Compensation” the Company’s net (loss) income and per share information would have been as follows on a pro-forma basis (dollars in thousands, except per share data):

 

10



 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income as reported

 

$

(28,445

)

$

1,881

 

$

(24,620

)

$

3,630

 

 

 

 

 

 

 

 

 

 

 

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

 

(166

)

(131

)

(498

)

(392

)

Pro forma net (loss) income

 

$

(28,611

)

$

1,750

 

$

(25,118

)

$

3,238

 

Basic EPS:

 

 

 

 

 

 

 

 

 

As Reported

 

$

(1.37

)

$

0.13

 

$

(1.45

)

$

0.24

 

Pro Forma

 

$

(1.38

)

$

0.12

 

$

(1.48

)

$

0.22

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

As Reported

 

$

(1.37

)

$

0.12

 

$

(1.45

)

$

0.24

 

Pro Forma

 

$

(1.38

)

$

0.11

 

$

(1.48

)

$

0.21

 

 

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

 

The weighted average fair value of options granted was $1.47 and $2.19 for the three months ended September 30, 2003 and 2002, respectively, and $1.62 and $2.33 for the nine months ended September 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 September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

2.74

%

3.85

%

3.03

%

4.06

%

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.              Restricted Cash

 

Included in the accompanying consolidated balance sheet as of September 30, 2003, is restricted cash of $17.9 million, which primarily consists of cash pledged to secure the guarantee of notes issued in connection with previous acquisitions by Insignia in the United Kingdom (UK).  The acquisitions include the 1999 acquisition of St. Quintin Holdings Limited and the 1998 acquisition of Richard Ellis Group Limited.

 

8.              Goodwill and Other Intangible Assets

 

The 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.  The Company is in the process of completing its annual impairment test as of October 1, 2003.

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows (dollars in thousands):

 

11



 

 

 

Americas

 

EMEA

 

Asia Pacific

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2003

 

$

467,668

 

$

106,063

 

$

3,406

 

$

577,137

 

 

 

 

 

 

 

 

 

 

 

Purchase accounting adjustments related to acquisitions

 

216,114

 

 

 

216,114

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2003

 

$

683,782

 

$

106,063

 

$

3,406

 

$

793,251

 

 

In accordance with SFAS No. 142, “Goodwill and Other Intangibles” all goodwill acquired in an acquisition should be assigned to reporting units as of the date of the acquisition.  In connection with the Insignia Acquisition, the Company is currently evaluating the fair value of the acquired reporting units and the applicable goodwill to be assigned.  As a result, the changes in the carrying amount of goodwill for the nine months ended September 30, 2003 do not reflect the allocation of goodwill based upon the fair value of Insignia’s acquired reporting units.

 

Other intangible assets totaled $153.8 million and $91.1 million, net of accumulated amortization of $42.6 million and $7.7 million, as of September 30, 2003 and December 31, 2002, respectively, and are comprised of the following (dollars in thousands):

 

 

 

As of September 30, 2003

 

As of December 31, 2002

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

 

 

 

 

 

 

 

 

 

 

Unamortizable intangible assets

 

 

 

 

 

 

 

 

 

Trademark

 

$

63,700

 

 

 

$

63,700

 

 

 

Trade name

 

19,445

 

 

 

 

 

 

Total

 

$

83,145

 

 

 

$

63,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets

 

 

 

 

 

 

 

 

 

Backlog

 

$

64,543

 

$

30,985

 

$

 

$

 

Management contracts

 

23,737

 

8,060

 

18,887

 

5,605

 

Loan servicing rights

 

17,071

 

3,361

 

16,234

 

2,134

 

Other

 

8,050

 

350

 

 

 

Total

 

$

113,401

 

$

42,756

 

$

35,121

 

$

7,739

 

 

In accordance with SFAS No. 141, “Business Combinations,” a $63.7 million trademark was separately identified as a result of the 2001 Merger.  As a result of the Insignia Acquisition, a $19.4 million trade name was separately identified, which represents the Richard Ellis trade name in the UK that was owned by Insignia prior to the Insignia Acquisition.  Both the trademark and the trade name have indefinite useful lives and accordingly are not being amortized.

 

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

 

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

 

Loan servicing rights represent the fair value of servicing assets in the Company’s mortgage banking line of business in the US that were acquired as part of the 2001 Merger.  The loan servicing rights are being amortized over estimated useful lives of up to ten years.

 

12



 

Other amortizable intangible assets include producer employment contracts in the US, UK, France and other European operations as well as franchise agreements and a trade name in France.  These other intangible assets are being amortized over estimated useful lives of up to ten years.

 

Amortization expense related to intangible assets was $32.5 million and $34.4 million for the three and nine months ended September 30, 2003, respectively.  The estimated amortization expense for the five years ending December 31, 2007 approximates $59.0 million, $17.5 million, $6.2 million, $5.4 million and $5.3 million, respectively.

 

9.     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:

 

 

 

September 30,
2003

 

December 31,
2002

 

 

 

 

 

 

 

Current assets

 

$

144,801

 

$

127,635

 

Noncurrent assets

 

$

1,973,473

 

$

1,552,546

 

Current liabilities

 

$

239,388

 

$

108,463

 

Noncurrent liabilities

 

$

828,133

 

$

664,241

 

Minority interest

 

$

4,310

 

$

3,938

 

 

Condensed Statements of Operations Information:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

116,516

 

$

83,435

 

$

319,328

 

$

252,341

 

Operating income

 

$

31,296

 

$

17,786

 

$

87,046

 

$

58,335

 

Net income

 

$

31,135

 

$

24,579

 

$

78,922

 

$

34,035

 

 

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, L.P., 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.

 

10.  Employee Benefit Plans

 

On July 23, 2003, the Company issued 876,000 options to acquire Class A common stock at an exercise price of $16.00 per share to employees.  These options vest and are exercisable in 20% increments over a five-year period ending July 23, 2008.  All of the options will become fully vested and exercisable upon a change in control of the Company.

 

In connection with the Insignia Acquisition, the Company assumed Insignia’s existing employee benefit plans including a 401(k) Retirement Savings Plan, a 401(k) Restoration Plan and two defined benefit plans.

 

The 401(k) Retirement Savings Plan covers substantially all Insignia employees in the U.S.  Insignia made contributions equal to 25% of the employees’ contribution up to a maximum of 6% of the employees’ compensation and participants fully vest in employer contributions after 5 years.  All contributions to the 401(k) Savings Plan were expensed in earnings.  Insignia’s contribution was discontinued on July 23, 2003.  Upon the close of the Insignia Acquisition, participants in the Insignia 401(k) Savings Plan were required to join the Company’s Capital Accumulation Plan (the Cap Plan).  Currently, only loan payments are being accepted into the former Insignia 401(k) Savings Plan until the Company receives IRS approval to terminate the plan and transfer plan balances into the Cap Plan.

 

The 401(k) Restoration Plan allows designated executives of Insignia and certain participating affiliated employees in the Insignia 401(k) Retirement Savings Plan to defer the receipt of a portion of their compensation in excess of the amount of compensation that is permitted to be contributed to the 401(k) Retirement Savings Plan.  This plan is intended to constitute an unfunded “top hat” plan described in Section 201(2), 302(a0(3) and 401(a)1) of the Employee Retirement Income Security Act of 1974, as amended (ERISA).  This plan ceased to accept deferrals on July 23, 2003.

 

Insignia maintains two defined benefit plans for some of its employees.  The plans provide benefits based upon the final salary of participating employees.  The funding policy is to contribute annually an amount to fund pension cost as actuarially determined by an independent pension consulting firm.

 

11.  Debt

 

The Company issued $200.0 million in aggregate principal amount of 9¾% Senior Notes due May 15, 2010 (the 9¾% Senior Notes) on May 22, 2003.  The 9¾% Senior Notes are unsecured obligations, and rank equal in right of payment with existing and future senior indebtedness and senior in right of payment to any existing and future subordinated indebtedness of the Company.  The 9¾% Senior Notes are jointly and severally guaranteed on a senior basis by the Company and its domestic subsidiaries.  Interest accrues at a rate of 9¾% per year 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

 

13



 

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 September 30, 2003.

 

In accordance with the terms of the offering of the 9¾% Senior Notes, the proceeds from the sale of the 9¾% Senior Notes were placed in escrow on May 22, 2003.  The proceeds were released from this escrow account on July 23, 2003, the date of the Insignia Acquisition.

 

In connection with the Insignia Acquisition, the Company entered into an amended and restated credit agreement with CSFB and other lenders (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 and $75.0 million of which was drawn in connection with the Insignia Acquisition), 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 is defined in the amended and restated credit agreement.  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.  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 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 September 30, 2003 had no line of credit borrowings outstanding. The total amount outstanding under the Credit Facility included in senior secured term loans and current maturities of long-term debt in the accompanying consolidated balance sheets was $288.5 million and $221.0 million as of September 30, 2003 and December 31, 2002, respectively.

 

The Company issued $229.0 million in aggregate principal amount of 11¼% Senior Subordinated Notes due June 15, 2011 (the 11¼% Senior Subordinated Notes), for approximately $225.6 million, net of discount, on June 7, 2001.  The 11¼% Senior Subordinated Notes are jointly and severally guaranteed on a senior subordinated basis by the Company and its domestic subsidiaries.  The 11¼% Senior Subordinated 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 11¼% Senior Subordinated 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 11¼% Senior Subordinated Notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest.  The amount of the 11¼% Senior Subordinated Notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $226.1 million and $225.9 million as of September 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% Senior Notes due on July 20, 2011 (the 16% Senior Notes).  The 16% 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

 

14



 

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 16% 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 September 30, 2003, the redemption price was 109.6% of par.  In the event of a change in control, the Company is obligated to make an offer to purchase all of the outstanding 16% Senior Notes at 101.0% of par.  The total amount of the 16% Senior Notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $63.4 million and $61.9 million as of September 30, 2003 and December 31, 2002, respectively.

 

The 16% Senior Notes are solely the Company’s obligation to repay.  CBRE has neither guaranteed nor pledged any of its assets as collateral for the 16% Senior Notes, and is not obligated to provide cash flow to the Company for repayment of these 16% 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 16% Senior Notes.  The Company will depend on CBRE’s cash flows to fund principal and interest payments as they come due.

 

The 9¾% Notes, the Credit Facility, the 11¼% Senior Subordinated Notes and the 16% 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, enter into sale/leaseback transactions, 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 secured 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 $163.7 million and $111.1 million with related weighted average interest rates of 2.5% and 3.9% as of September 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 a Third Amended and Restated Warehousing Credit and Security Agreement effective December 20, 2002.  The agreement provided for a revolving line of credit of $200.0 million, bore interest at the lower of one-month LIBOR or 2.0% (RFC Base Rate) plus 1.0% and expired on August 31, 2003.  On June 25, 2003, the agreement was 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 expired on August 30, 2003 and to change the RFC Base Rate to one-month LIBOR plus 1.0%.  By amendment on August 29, 2003, the expiration date of the agreement was extended to September 25, 2003.  On September 26, 2003, the Company entered into a Fourth Amended and Restated Warehousing Credit and Security Agreement.  The agreement provides for a revolving line of credit of up to $200.0 million, bears interest at one-month LIBOR plus 1.0% and expires on August 31, 2004.

 

During the three months ended September 30, 2003, the Company had a maximum of $272.5 million revolving line of credit principal outstanding with RFC.  At September 30, 2003 and December 31, 2002, respectively, the Company had a $135.8 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 $135.8 million and a $63.1 million warehouse receivable, which are also included in the accompanying consolidated balance sheets as of September 30, 2003 and December 31, 2002, respectively.

 

In connection with the Insignia Acquisition, the Company assumed $13.8 million of acquisition loan notes that were issued in connection with previous acquisitions by Insignia in the UK.  The acquisition loan notes are payable to sellers of the formerly acquired UK businesses and are secured by restricted cash deposits in approximately the same amount.  The acquisition loan notes are redeemable semi-annually at the discretion of the note holder and have a final maturity date of April 2010.  At September 30, 2003, the Company had $13.9 million in acquisition loan notes outstanding, which are included in short-term borrowings in the accompanying consolidated balance sheets.

 

In connection with the Insignia Acquisition, on July 23, 2003 the Company assumed and immediately repaid Insignia’s outstanding revolving credit facility of $28.0 million and subordinated credit facility of $15.0 million.

 

15



 

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 September 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.  During the third quarter of 2003, the maturity date on this non-recourse debt was extended to July 31, 2008.  At September 30, 2003 and December 31, 2002, respectively, the Company had $40.4 million of non-recourse debt outstanding included in other long-term debt and $40.0 million of non-recourse debt outstanding included in short-term borrowings in the accompanying consolidated balance sheets.  Additionally, during the third quarter of 2003, through this joint venture the Company incurred additional non-recourse debt of $1.9 million with a maturity date of June 15, 2004.  At September 30, 2003, this $1.9 million of non-recourse debt is included in short-term borrowings in the accompanying consolidated balance sheets.

 

12.       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 previously executed an agreement with Fannie Mae to initially fund the purchase of a commercial mortgage loan portfolio using proceeds from its RFC line of credit.  Subsequently a 100% participation in the loan portfolio was sold to Fannie Mae with the Company retaining the credit risk on the first 2% of losses incurred on the underlying portfolio of commercial mortgage loans.  The current loan portfolio balance is $98.6 million and the Company has collateralized a portion of its obligations 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 other 1% is covered in the form of a guarantee to Fannie Mae.

 

The Company had outstanding letters of credit totaling $27.8 million as of September 30, 2003 including approximately $10.2 million of letters of credit to partially secure construction loans which the Company assumed under the Island Purchase Agreement and the Fannie Mae letter of credit discussed in the preceding paragraph.  The letters of credit expire at varying dates through August 31, 2004, although the Company is obligated to renew the letters of credit related to the Island Purchase until as late as July 23, 2006.

 

The Company had guarantees totaling $10.5 million as of September 30, 2003, which consisted primarily of guarantees of overdraft facilities, property debt and the obligations to Fannie Mae discussed above.  Generally, the guarantees do not bear formal maturity dates and remain outstanding until certain conditions have been satisfied.

 

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 September 30, 2003, the Company had committed an additional $21.4 million to fund future co-investments.

 

13.         Comprehensive (Loss) Income

 

Comprehensive (loss) income consists of net (loss) income and other comprehensive (loss) income.  Accumulated other comprehensive loss consists of foreign currency translation adjustments and minimum pension liability adjustments.  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 (loss) income (dollars in thousands):

 

16



 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(28,445

)

$

1,881

 

$

(24,620

)

$

3,630

 

Foreign currency translation gain (loss)

 

4,548

 

(8,285

)

1,274

 

2,027

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(23,897

)

$

(6,404

)

$

(23,346

)

$

5,657

 

 

14.       Per Share Information

 

For the three and nine months ended September 30, 2003, basic and diluted loss per share for the Company was computed by dividing the net loss by the weighted average number of common shares outstanding of 20,743,011 and 16,957,494, respectively.  As a result of operating losses incurred, diluted weighted average shares outstanding did not give effect to common stock equivalents, as to do so would have been anti-dilutive.

 

For the three and nine months ended September 30, 2002, basic income per share for the Company was computed by dividing the net income by the weighted average number of common shares outstanding of 15,016,044 and 15,033,640, respectively.  Diluted income per share included the dilutive effect of contingently issuable shares of 209,744 and 183,100 for the three and nine months ended September 30, 2002 respectively.

 

15.       Fiduciary Funds

 

The accompanying consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which amounted to $472.5 million and $414.6 million at September 30, 2003 and December 31, 2002, respectively.

 

16.       Merger-Related Charges

 

The Company recorded merger-related charges of $19.8 million for the nine months ended September 30, 2003 in connection with the Insignia Acquisition.  The charges consisted of the following (dollars in thousands):

 

 

 

2003 Charge

 

Utilized to
Date

 

To be
Utilized

 

Lease termination costs

 

$

7,637

 

$

383

 

$

7,254

 

Change of control payments

 

4,687

 

4,687

 

 

Severance

 

3,824

 

3,824

 

 

Consulting costs

 

2,003

 

2,003

 

 

Other

 

1,644

 

1,644

 

 

 

 

 

 

 

 

 

 

Total merger-related charges

 

$

19,795

 

$

12,541

 

$

7,254

 

 

17.       Guarantor and Nonguarantor Financial Statements

 

In connection with the Insignia Acquisition, CBRE issued an aggregate of $200.0 million in Senior Notes (the 9¾% Senior Notes) due May 15, 2010.  These 9¾% Senior Notes are unsecured and rank equally in right of payment with existing and future senior indebtedness and senior in right of payment to any existing and future subordinated indebtedness.  The 9¾% Senior Notes are effectively subordinated to indebtedness and other liabilities of the Company’s subsidiaries that are not guarantors of the 9¾% Senior Notes.  The 9¾% Senior Notes are guaranteed on a full, unconditional, joint and several and senior basis by the Company and CBRE’s domestic subsidiaries.

 

In connection with the 2001 Merger, CBRE issued an aggregate of $229.0 million in 11¼% Senior Subordinated Notes (the 11¼% Senior Subordinated Notes) due June 15, 2011.  The 11¼% Senior Subordinated Notes are unsecured and rank equally in right of payment with any of the Company’s senior subordinated unsecured indebtedness. The 11¼% Senior Subordinated Notes are effectively subordinated to indebtedness and other liabilities of the Company’s subsidiaries that are not guarantors of the 11¼% Senior Subordinated Notes.  The 11¼% Senior Subordinated Notes are guaranteed on a full, unconditional, joint and several and senior subordinated basis by the Company and CBRE’s domestic subsidiaries.

 

17



 

The following condensed consolidating financial information includes:

 

(1)   Condensed consolidating balance sheets as of September 30, 2003 and December 31, 2002; condensed consolidating statements of operations for the three and nine months ended September 30, 2003 and 2002, and condensed consolidating statements of cash flows for the nine months ended September 30, 2003 and 2002, of (a) the Company, as 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 the Company, as the parent, with CBRE and its guarantor and nonguarantor subsidiaries.

 

Investments in consolidated subsidiaries are presented using the equity method of accounting.  The principal elimination entries eliminate investments in consolidated subsidiaries and inter-company balances and transactions.   In accordance with SFAS No. 142, all goodwill acquired in an acquisition should be assigned to reporting units as of the date of the acquisition.  In connection with the Insignia Acquisition, the Company is currently evaluating the fair value of the acquired reporting units and the applicable goodwill to be assigned.  As a result, the condensed consolidating balance sheet as of September 30, 2003 does not reflect this allocation of goodwill based upon the fair value of Insignia’s acquired reporting units.  In addition, the preliminary estimated fair value of other intangible assets acquired in the Insignia Acquisition, along with the related amortization expense, have been reported in the accompanying condensed financial information of the guarantor subsidiaries.  Once the Company finalizes the purchase accounting related to the Insignia Acquisition, other intangible assets and the related amortization expense will be re-allocated to the non-guarantor subsidiaries.

 

18



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2003

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Elimination

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,066

 

$

20

 

$

59,302

 

$

6,106

 

$

 

$

85,494

 

Restricted cash

 

 

 

14,688

 

3,224

 

 

17,912

 

Receivables, less allowance for doubtful accounts

 

24

 

18

 

120,139

 

130,427

 

 

250,608

 

Warehouse receivable

 

 

 

135,820

 

 

 

135,820

 

Prepaid expenses and other current assets

 

75,307

 

23,389

 

17,297

 

23,438

 

(21,730

)

117,701

 

Total current assets

 

95,397

 

23,427

 

347,246

 

163,195

 

(21,730

)

607,535

 

Property and equipment, net

 

 

 

75,051

 

35,654

 

 

110,705

 

Goodwill

 

 

 

658,109

 

135,142

 

 

793,251

 

Other intangible assets, net

 

 

 

151,980

 

1,810

 

 

153,790

 

Deferred compensation assets

 

 

70,077

 

 

 

 

70,077

 

Investment in and advances to unconsolidated subsidiaries

 

 

4,896

 

49,123

 

10,463

 

 

64,482

 

Investment in consolidated subsidiaries

 

322,194

 

197,723

 

68,836

 

 

(588,753

)

 

Inter-company loan receivable

 

 

858,277

 

 

 

(858,277

)

 

Deferred tax assets, net

 

26,227

 

 

 

 

 

26,227

 

Other assets

 

4,476

 

26,135

 

55,117

 

55,229

 

 

140,957

 

Total assets

 

$

448,294

 

$

1,180,535

 

$

1,405,462

 

$

401,493

 

$

(1,468,760

)

$

1,967,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,132

 

$

18,299

 

$

47,813

 

$

69,051

 

$

 

$

137,295

 

Inter-company payable

 

21,730

 

 

 

 

(21,730

)

 

Compensation and employee benefits payable

 

 

 

101,666

 

50,742

 

 

152,408

 

Accrued bonus and profit sharing

 

 

 

63,741

 

38,101

 

 

101,842

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse line of credit

 

 

 

135,820

 

 

 

135,820

 

Other

 

 

 

14,757

 

13,157

 

 

27,914

 

Total short-term borrowings

 

 

 

150,577

 

13,157

 

 

163,734

 

Current maturities of long-term debt

 

 

11,350

 

 

427

 

 

11,777

 

Total current liabilities

 

23,862

 

29,649

 

363,797

 

171,478

 

(21,730

)

567,056

 

Long-Term Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

11¼% senior subordinated notes, net of unamortized discount

 

 

226,114

 

 

 

 

226,114

 

Senior secured term loans

 

 

277,113

 

 

 

 

277,113

 

9¾% senior notes

 

 

200,000

 

 

 

 

200,000

 

16% senior notes, net of unamortized discount

 

63,416

 

 

 

 

 

63,416

 

Other long-term debt

 

 

 

12,129

 

40,604

 

 

52,733

 

Inter-company loan payable

 

 

 

790,638

 

67,639

 

(858,277

)

 

Total long-term debt

 

63,416

 

703,227

 

802,767

 

108,243

 

(858,277

)

819,376

 

Deferred compensation liability

 

 

125,465

 

 

 

 

125,465

 

Other liabilities

 

12,320

 

 

41,175

 

46,230

 

 

99,725

 

Total liabilities

 

99,598

 

858,341

 

1,207,739

 

325,951

 

(880,007

)

1,611,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

 

6,706

 

 

6,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

348,696

 

322,194

 

197,723

 

68,836

 

(588,753

)

348,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

448,294

 

$

1,180,535

 

$

1,405,462

 

$

401,493

 

$

(1,468,760

)

$

1,967,024

 

 

19



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 30, 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

 

 

20



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Elimination

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

309,075

 

$

114,301

 

$

 

$

423,376

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

156,972

 

51,226

 

 

208,198

 

Operating, administrative and other

 

88

 

(1,994

)

125,412

 

56,792

 

 

180,298

 

Depreciation and amortization

 

 

 

38,162

 

2,909

 

 

41,071

 

Equity (income) loss from unconsolidated subsidiaries

 

 

(60

)

(2,539

)

281

 

 

(2,318

)

Merger-related charges

 

 

 

14,151

 

2,334

 

 

16,485

 

Operating (loss) income

 

(88

)

2,054

 

(23,083

)

759

 

 

(20,358

)

Interest income

 

67

 

10,596

 

832

 

471

 

(10,178

)

1,788

 

Interest expense

 

2,947

 

25,666

 

8,389

 

1,431

 

(10,178

)

28,255

 

Equity (loss) income from consolidated subsidiaries

 

(26,924

)

(20,315

)

1,813

 

 

45,246

 

 

Loss before (benefit) provision for income taxes

 

(26,924

)

(33,331

)

(28,827

)

(201

)

45,246

 

(46,825

)

(Benefit) provision for income taxes

 

(1,447

)

(6,407

)

(8,512

)

(2,014

)

 

(18,380

)

Net (loss) income

 

$

(28,445

)

$

(26,924

)

$

(20,315

)

$

1,813

 

$

45,426

 

$

(28,445

)

 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Elimination

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

211,791

 

$

73,137

 

$

 

$

284,928

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

103,245

 

32,425

 

 

135,670

 

Operating, administrative and other

 

60

 

312

 

85,368

 

38,730

 

 

124,470

 

Depreciation and amortization

 

 

 

4,065

 

2,339

 

 

6,404

 

Equity income from unconsolidated subsidiaries

 

 

(226

)

(2,440

)

(112

)

 

(2,778

)

Merger-related charges

 

 

 

 

 

 

 

Operating (loss) income

 

(60

)

(86

)

21,553

 

(245

)

 

21,162

 

Interest income

 

38

 

10,154

 

643

 

566

 

(10,126

)

1,275

 

Interest expense

 

2,850

 

10,944

 

9,270

 

2,482

 

(10,126

)

15,420

 

Equity income (loss) from consolidated subsidiaries

 

3,458

 

6,350

 

(661

)

 

(9,147

)

 

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

 

586

 

5,474

 

12,265

 

(2,161

)

(9,147

)

7,017

 

(Benefit) provision for income taxes

 

(1,295

)

2,016

 

5,915

 

(1,500

)

 

5,136

 

Net income (loss)

 

$

1,881

 

$

3,458

 

$

6,350

 

$

(661

)

$

(9,147

)

$

1,881

 

 

21



 

 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Elimination

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

727,394

 

$

281,423

 

$

 

$

1,008,817

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

359,672

 

125,191

 

 

484,863

 

Operating, administrative and other

 

244

 

2,716

 

298,302

 

142,632

 

 

443,894

 

Depreciation and amortization

 

 

 

46,704

 

6,867

 

 

53,571

 

Equity (income) loss from unconsolidated subsidiaries

 

 

(84

)

(9,461

)

363

 

 

(9,182

)

Merger-related charges

 

 

 

15,890

 

3,905

 

 

19,795

 

Operating (loss) income

 

(244

)

(2,632

)

16,287

 

2,465

 

 

15,876

 

Interest income

 

136

 

29,380

 

1,916

 

1,072

 

(28,940

)

3,564

 

Interest expense

 

8,800

 

45,936

 

28,491

 

5,232

 

(28,940

)

59,519

 

Equity loss from consolidated subsidiaries

 

(19,371

)

(10,044

)

(957

)

 

30,372

 

 

Loss before (benefit) provision for income taxes

 

(28,279

)

(29,232

)

(11,245

)

(1,695

)

30,372

 

(40,079

)

(Benefit) provision for income taxes

 

(3,659

)

(9,861

)

(1,201

)

(738

)

 

(15,459

)

Net loss

 

$

(24,620

)

$

(19,371

)

$

(10,044

)

$

(957

)

$

30,372

 

$

(24,620

)

 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Elimination

 

Consolidated Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

585,402

 

$

208,409

 

$

 

$

793,811

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

 

272,678

 

90,828

 

 

363,506

 

Operating, administrative and other

 

300

 

3,900

 

253,492

 

106,984

 

 

364,676

 

Depreciation and amortization

 

 

 

11,712

 

6,395

 

 

18,107

 

Equity income from unconsolidated subsidiaries

 

 

(572

)

(4,998

)

(852

)

 

(6,422

)

Merger-related charges

 

 

50

 

 

 

 

50

 

Operating (loss) income

 

(300

)

(3,378

)

52,518

 

5,054

 

 

53,894

 

Interest income

 

123

 

33,219

 

1,643

 

820

 

(33,132

)

2,673

 

Interest expense

 

8,465

 

32,354

 

30,904

 

7,750

 

(33,132

)

46,341

 

Equity income (loss) from consolidated subsidiaries

 

8,301

 

15,779

 

(966

)

 

(23,114

)

 

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

 

(341

)

13,266

 

22,291

 

(1,876

)

(23,114

)

10,226

 

(Benefit) provision for income taxes

 

(3,971

)

4,965

 

6,512

 

(910

)

 

6,596

 

Net income (loss)

 

$

3,630

 

$

8,301

 

$

15,779

 

$

(966

)

$

(23,114

)

$

3,630

 

 

22



 

 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:

 

$

(46,824

)

$

28,930

 

$

(31,706

)

$

(21,114)

 

$

(70,714

)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures, net of concessions received

 

 

 

(9,163

)

978

 

(8,185

)

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

 

 

 

(243,847

)

 

(243,847

)

Other investing activities, net

 

 

26

 

2,638

 

(3,316

)

(652

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

 

26

 

(250,372

)

(2,338

)

(252,684

)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from revolver and swingline credit facility

 

 

152,850

 

 

 

152,850

 

Repayment of revolver and swingline credit facility

 

 

(152,850

)

 

 

(152,850

)

Proceeds from senior secured term loans

 

 

75,000

 

 

 

75,000

 

Repayment of senior secured term loans

 

 

(7,513

)

 

 

(7,513

)

Repayment of notes payable

 

 

(43,000

)

 

 

(43,000

)

Proceeds from 9 3/4% senior notes

 

 

200,000

 

 

 

200,000

 

Proceeds from short term borrowings and other loans, net

 

 

 

 

3,732

 

3,732

 

Proceeds from issuance of common stock

 

120,580

 

 

 

 

120,580

 

(Increase) decrease in intercompany receivables, net

 

 

(233,711

)

267,207

 

20,127

 

 

Other financing activities, net

 

(194

)

(19,766

)

 

(341

)

(20,301

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

66,763

 

(28,990

)

267,207

 

23,518

 

328,498

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

19,939

 

(34

)

(14,871

)

66

 

5,100

 

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

127

 

54

 

74,173

 

5,347

 

79,701

 

Effect of currency exchange rate changes on cash

 

 

 

 

693

 

693

 

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

20,066

 

$

20

 

$

59,302

 

$

6,106

 

$

85,494

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DATA:

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

Interest (net of amount capitalized)

 

$

4,038

 

$

21,949

 

$

1,371

 

$

4,336

 

$

31,694

 

Income taxes, net of refunds

 

$

25,533

 

$

 

$

 

$

 

$

25,533

 

 

23



 

CBRE HOLDING, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

(Unaudited)

(Dollars in thousands)

 

 

 

Parent

 

CBRE

 

Guarantor
Subsidiaries

 

Nonguarantor
Subsidiaries

 

Consolidated
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:

 

$

557

 

$

2,910

 

$

(16,510

)

$

(5,927

)

$

(18,970

)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures, net of concessions received

 

 

 

(6,354

)

(1,927

)

(8,281

)

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

 

 

(11,760

)

419

 

(3,188

)

(14,529

)

Other investing activities, net

 

 

44

 

3,973

 

2,331

 

6,348

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(11,716

)

(1,962

)

(2,784

)

(16,462

)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from revolver and swingline credit facility

 

 

214,250

 

 

 

214,250

 

Repayment of revolver and swingline credit facility

 

 

(207,250

)

 

 

(207,250

)

(Repayment of) proceeds from senior notes and other loans, net

 

 

(189

)

(3,016

)

1,829

 

(1,376

)

Repayment of senior secured term loans

 

 

(7,014

)

 

 

(7,014

)

Decrease (increase) in intercompany receivables, net

 

 

8,405

 

(8,199

)

(206

)

 

Other financing activities, net

 

(539

)

(172

)

(94

)

130

 

(675

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(539

)

8,030

 

(11,309

)

1,753

 

(2,065

)

 

 

 

 

 

 

 

 

 

 

 

 

NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

18

 

(776

)

(29,781

)

(6,958

)

(37,497

)

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

 

3

 

931

 

42,204

 

14,312

 

57,450

 

Effect of currency exchange rate changes on cash

 

 

 

 

(1,469

)

(1,469

)

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

 

$

21

 

$

155

 

$

12,423

 

$

5,885

 

$

18,484

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DATA:

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

Interest (net of amount capitalized)

 

$

6,520

 

$

22,691

 

$

1,356

 

$

3,394

 

$

33,961

 

Income taxes, net of refunds

 

$

16,481

 

$

 

$

 

$

 

$

16,481

 

 

24



 

18.       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.  As discussed in notes 8 and 17, the Company has not yet finalized the purchase accounting for the Insignia Acquisition.  As a result, goodwill and other intangible assets acquired in the Insignia Acquisition, along with the related amortization expense, have been included in the Americas segment.  Upon finalization of the purchase accounting for the Insignia Acquisition, goodwill, other intangible assets and the related amortization expense will be re-allocated to the appropriate segments.  The following table summarizes the revenue and operating income (loss) by operating segment (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Revenue

 

 

 

 

 

 

 

 

 

Americas

 

$

324,508

 

$

224,188

 

$

766,995

 

$

618,709

 

EMEA

 

69,390

 

38,261

 

167,020

 

111,632

 

Asia Pacific

 

29,478

 

22,479

 

74,802

 

63,470

 

 

 

$

423,376

 

$

284,928

 

$

1,008,817

 

$

793,811

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

 

 

 

 

 

 

 

Americas

 

$

(19,804

)

$

21,524

 

$

15,486

 

$

48,679

 

EMEA

 

(3,671

)

(159

)

(3,072

)

1,791

 

Asia Pacific

 

3,117

 

(203

)

3,462

 

3,424

 

 

 

(20,358

)

21,162

 

15,876

 

53,894

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

1,788

 

1,275

 

3,564

 

2,673

 

Interest expense

 

28,255

 

15,420

 

59,519

 

46,341

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(46,825

)

$

7,017

 

$

(40,079

)

$

10,226

 

 

 

 

September 30,
2003

 

December 31,
2002

 

 

 

(dollars in thousands)

 

Identifiable assets

 

 

 

 

 

Americas

 

$

1,408,986

 

$

868,990

 

EMEA

 

264,121

 

198,027

 

Asia Pacific

 

107,448

 

123,059

 

Corporate

 

186,469

 

134,800

 

 

 

$

1,967,024

 

$

1,324,876

 

 

Identifiable assets by industry segment are those assets used in the Company’s operations in each segment. Corporate identifiable assets are primarily cash and cash equivalents and net deferred tax assets.

 

19.       Subsequent Events

 

On October 14, 2003, the Company refinanced all of the outstanding loans under the Credit Facility it entered into in connection with the completion of the Insignia Acquisition.  As part of this refinancing, the Company entered into a new amended and restated credit agreement.  The prior Credit Facility was, and the new amended and restated credit facilities continue to be, jointly and severally guaranteed by the Company and its domestic subsidiaries and secured by substantially all of their assets.

 

In connection with the October 14, 2003 refinancing of the senior secured credit facilities and the signing of a new amended and restated credit agreement, the former Tranche A term facility and Tranche B term facility were combined into a new single term loan facility.  The new term loan facility, of which $300.0 million was drawn on October 14, 2003, requires quarterly principal payments of $2.5 million through September 30, 2008 and matures on December 31, 2008.  Borrowings under the new term loan facility bear interest at varying rates based, at the Company’s option, on either LIBOR plus 3.25% or the alternate base rate plus 2.25%.  The maturity date and interest rate for borrowings under the revolving credit facility remain unchanged in the new amended and restated credit agreement.  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.

 

25



 

On October 27, 2003, the Company redeemed $20.0 million in aggregate principal amount of its 16% Senior Notes.  The Company paid a $1.9 million premium in connection with this redemption.

 

Early in the fourth quarter of 2003, the Company announced that effective January 1, 2004, it will close the Deferred Compensation Plan (DCP) to new participants.  During 2004, the DCP will continue to accept compensation deferrals from participants who currently have a balance, meet the eligibility requirements and elect to participate, up to a maximum annual contribution amount of $250,000 per participant.  However, the DCP will cease accepting compensation deferrals from current participants effective January 1, 2005.

 

26



 

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), 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 (the 2001 Merger).  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 May 28, 2003 (the Insignia Acquisition Agreement), by and among the Company, CBRE, Apple Acquisition Corp. (Apple Acquisition), a Delaware corporation and wholly owned subsidiary of CBRE, and Insignia Financial Group, Inc. (Insignia), a Delaware corporation, Apple Acquisition was merged with and into Insignia (the Insignia Acquisition).  Insignia was the surviving corporation in the Insignia Acquisition and at the effective time of the Insignia Acquisition became a wholly owned subsidiary of CBRE.  The Company acquired Insignia to solidify its position as the market leader in the commercial real estate services industry.

 

Results of Operations

 

The following tables set forth items derived from the consolidated statements of operations for the three and nine months ended September 30, 2003 and 2002 presented in dollars and as a percentage of revenue:

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(Dollars in thousands)

 

Revenue

 

423,376

 

100.0

%

284,928

 

100.0

%

1,008,817

 

100.0

%

793,811

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

208,198

 

49.2

 

135,670

 

47.6

 

484,863

 

48.1

 

363,506

 

45.8

 

Operating, administrative and other

 

180,298

 

42.6

 

124,470

 

43.7

 

443,894

 

44.0

 

364,676

 

45.9

 

Depreciation and amortization

 

41,071

 

9.7

 

6,404

 

2.2

 

53,571

 

5.3

 

18,107

 

2.3

 

Equity income from unconsolidated subsidiaries

 

(2,318

)

(0.5

)

(2,778

)

(1.0

)

(9,182

)

(0.9

)

(6,422

)

(0.8

)

Merger-related charges

 

16,485

 

3.9

 

 

 

19,795

 

2.0

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(20,358

)

(4.8

)

21,162

 

7.4

 

15,876

 

1.6

 

53,894

 

6.8

 

Interest income

 

1,788

 

0.4

 

1,275

 

0.4

 

3,564

 

0.4

 

2,673

 

0.3

 

Interest expense

 

28,255

 

6.7

 

15,420

 

5.4

 

59,519

 

5.9

 

46,341

 

5.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(46,825

)

(11.1

)

7,017

 

2.5

 

(40,079

)

(4.0

)

10,226

 

1.3

 

(Benefit) provision for income taxes

 

(18,380

)

(4.3

)

5,136

 

1.8

 

(15,459

)

(1.5

)

6,596

 

0.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(28,445

)

(6.7

)%

$

1,881

 

0.7

%

$

(24,620

)

(2.4

)%

$

3,630

 

0.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

20,713

 

4.9

%

$

27,566

 

9.7

%

$

69,447

 

6.9

%

$

72,001

 

9.1

%

 

EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization.  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 measurement 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 of America, or (ii) operating cash flow determined in accordance with accounting principles generally accepted in the United States of America.  The Company’s calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.

 

27



 

EBITDA is calculated as follows (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

$

(20,358

)

$

21,162

 

$

15,876

 

$

53,894

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

41,071

 

6,404

 

53,571

 

18,107

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

20,713

 

$

27,566

 

$

69,447

 

$

72,001

 

 

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

 

The Company reported a consolidated net loss of $28.4 million for the three months ended September 30, 2003 on revenue of $423.4 million as compared to consolidated net income of $1.9 million on revenue of $284.9 million for the three months ended September 30, 2002.

 

Revenue on a consolidated basis increased $138.4 million or 48.6% during the three months ended September 30, 2003 as compared to the three months ended September 30, 2002.  The increase was primarily driven by higher revenue as a result of the Insignia Acquisition as well as increased worldwide sales and lease transaction revenue and appraisal fees.  Additionally, foreign currency translation had an $8.8 million positive impact on total revenue during the quarter ended September 30, 2003.

 

Cost of services on a consolidated basis totaled $208.2 million, an increase of $72.5 million or 53.5% over the third quarter of 2002. This increase was mainly attributable to higher commission expense due to increased revenue as a result of the Insignia Acquisition as well as higher worldwide sales and lease transaction revenue.  Also contributing to the variance were increased worldwide payroll related costs, including insurance and pension expense in the United Kingdom (UK) , which were partially caused by the Insignia Acquisition as well as increased headcount in Europe.  Additionally, foreign currency translation had a $4.1 million negative impact on cost of services during the current year period.  As a result, cost of services as a percentage of revenue increased from 47.6% for the third quarter of 2002 to 49.2% for the third quarter of the current year.

 

Operating, administrative and other expenses on a consolidated basis were $180.3 million, an increase of $55.8 million or 44.9% for the three months ended September 30, 2003 as compared to the third quarter of the prior year. The increase was primarily driven by increased costs as a result of the Insignia Acquisition, including $1.2 million of integration costs, as well as higher worldwide payroll related expenses and bonuses.  Included in the 2003 bonus amount was an accrual for a one-time performance award of approximately $1.9 million.  In addition, occupancy expense was higher in the UK as a result of the Company’s relocation to a new facility.  Lastly, foreign currency translation had a $4.0 million negative impact on total operating expenses for the three months ended September 30, 2003.

 

Depreciation and amortization expense on a consolidated basis increased by $34.7 million or 541.3% mainly due to higher amortization expense primarily as a result of net revenue backlog acquired as part of the Insignia Acquisition.

 

Equity income from unconsolidated subsidiaries on a consolidated basis decreased $0.5 million or 16.6% for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002 primarily due to higher minority interest expense in the current year.

 

Merger-related charges on a consolidated basis were $16.5 million for the three months ended September 30, 2003 and primarily consisted of lease termination costs associated with vacated spaces, change of control payments, consulting costs and severance costs, all of which were attributable to the Insignia Acquisition.

 

Consolidated interest expense was $28.3 million, an increase of $12.8 million or 83.2% for the three months ended September 30, 2003 as compared to the third quarter of the prior year.  This increase was primarily driven by a $6.8 million write-off of unamortized deferred financing fees associated with the prior credit facility as well as higher interest expense as a result of the additional debt issued in connection with the Insignia Acquisition.

 

28



 

Benefit for income tax on a consolidated basis was $18.4 million for the three months ended September 30, 2003 as compared to a provision for income tax of $5.1 million for the three months ended September 30, 2002.  The income tax (benefit) provision and effective tax rate were not comparable between periods due to the effects of the Insignia Acquisition.  Additionally, 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 contributed to a lower effective tax rate in the current year.

 

Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September 30, 2002

 

The Company reported a consolidated net loss of $24.6 million for the nine months ended September 30, 2003 on revenue of $1.0 billion as compared to consolidated net income of $3.6 million on revenue of $793.8 million for the nine months ended September 30, 2002.

 

Revenue on a consolidated basis increased $215.0 million or 27.1% during the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002.  The increase was driven by higher revenue as a result of the Insignia Acquisition, significantly higher worldwide sales transaction revenue as well as increased worldwide appraisal fees and lease transaction revenue.   Additionally, foreign currency translation had a $28.6 million positive impact on total revenue during the nine months ended September 30, 2003.

 

Cost of services on a consolidated basis totaled $484.9 million, an increase of $121.4 million or 33.4% from the nine months ended September 30, 2002. This increase was mainly due to higher commission expense as a result of the Insignia Acquisition as well as increased worldwide sales and lease transaction revenue.  Increased worldwide payroll related costs, primarily insurance, also contributed to the variance. Additionally, foreign currency translation had a $12.5 million negative impact on cost of services during the current year period.  As a result, cost of services as a percentage of revenue increased from 45.8% for the nine months ended September 30, 2002 to 48.1% for the nine months ended September 30, 2003.

 

Operating, administrative and other expenses on a consolidated basis were $443.9 million, an increase of $79.2 million or 21.7 % for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. The increase was primarily driven by higher costs as a result of the Insignia Acquisition, including $1.2 million of integration costs, as well as increased worldwide bonuses, payroll related expenses and consulting expenses, principally in the Americas and Europe.  Included in the 2003 bonus amount was an accrual for a one-time performance award of approximately $6.9 million.  In addition, occupancy expense was higher in the UK as a result of the Company’s relocation to a new facility.  Lastly, foreign currency translation had a $13.7 million negative impact on total operating expenses during the nine months ended September 30, 2003.  These increases were partially offset by net foreign currency transaction gains resulting from the weaker U.S. dollar.

 

Depreciation and amortization expense on a consolidated basis increased by $35.5 million or 195.9% mainly due to an increase in amortization expense primarily as a result of net revenue backlog acquired as part of the Insignia Acquisition.  The increase in amortization expense was also 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 in connection with the 2001 Merger.

 

Equity income from unconsolidated subsidiaries on a consolidated basis increased $2.8 million or 43.0% for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002 primarily due to a gain on sale of owned units in an investment fund.

 

Merger-related charges on a consolidated basis were $19.8 million for the nine months ended September 30, 2003.  These charges primarily consisted of lease termination costs associated with vacated spaces, change of control payments, consulting costs and severance costs, all of which were attributable to the Insignia Acquisition.

 

Consolidated interest expense was $59.5 million for the nine months ended September 30, 2003, an increase of $13.2 million or 28.4% as compared to the nine months ended September 30, 2002.  This increase was primarily driven by a $6.8 million write-off of unamortized deferred financing fees associated with the prior credit facility as well as higher interest expense as a result of the additional debt issued in connection with the Insignia Acquisition.

 

Benefit for income tax on a consolidated basis was $15.5 million for the nine months ended September 30, 2003 as compared to provision for income tax of $6.6 million for the nine months ended September 30, 2002.  The income tax (benefit) provision and effective tax rate were not comparable between periods due to the effects of the Insignia Acquisition.  Additionally, 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 contributed to a lower effective tax rate in the current year.

 

29



 

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 Company has not yet finalized the purchase accounting for the Insignia Acquisition.  As a result, other intangible assets acquired in the Insignia Acquisition, along with the related amortization expense, have been included in the Americas segment (see Note 18 of the Notes to Consolidated Financial Statements).  Upon finalization of the purchase accounting for the Insignia Acquisition, other intangible assets and the related amortization expense will be re-allocated to the appropriate segments.  The Americas results for the nine months ended September 30, 2003 include merger-related charges of $15.9 million attributable to the Insignia Acquisition.  The EMEA results for the nine months ended September 30, 2003 include merger-related charges of $3.9 million associated with the Insignia Acquisition.  The following table summarizes the revenue, costs and expenses, and operating income (loss) by operating segment for the periods ended September 30, 2003 and 2002 (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

324,508

 

100.0

%

$

224,188

 

100.0

%

$

766,995

 

100.0

%

$

618,709

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

165,013

 

50.9

 

109,919

 

49.0

 

380,942

 

49.7

 

291,173

 

47.1

 

Operating, administrative and other

 

129,170

 

39.8

 

90,842

 

40.5

 

316,352

 

41.2

 

271,803

 

43.9

 

Depreciation and amortization

 

38,512

 

11.9

 

4,354

 

1.9

 

47,703

 

6.2

 

12,561

 

2.0

 

Equity income from unconsolidated subsidiaries

 

(2,536

)

(0.8

)

(2,451

)

(1.1

)

(9,379

)

(1.2

)

(5,557

)

(0.9

)

Merger-related charges

 

14,153

 

4.4

 

 

 

15,891

 

2.1

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

$

(19,804

)

(6.1

)%

$

21,524

 

9.6

%

$

15,486

 

2.0

%

$

48,679

 

7.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

18,708

 

5.8

%

$

25,878

 

11.5

%

$

63,189

 

8.2

%

$

61,240

 

9.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EMEA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

69,390

 

100.0

%

$

38,261

 

100.0

%

$

167,020

 

100.0

%

$

111,632

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

30,779

 

44.4

 

16,063

 

42.0

 

71,160

 

42.6

 

45,344

 

40.6

 

Operating, administrative and other

 

38,088

 

54.9

 

21,143

 

55.3

 

91,237

 

54.6

 

61,319

 

54.9

 

Depreciation and amortization

 

1,609

 

2.3

 

1,220

 

3.2

 

3,430

 

2.1

 

3,194

 

2.9

 

Equity loss (income) from unconsolidated subsidiaries

 

253

 

0.4

 

(6

)

 

361

 

0.2

 

(16

)

 

Merger-related charges

 

2,332

 

3.4

 

 

 

3,904

 

2.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

$

(3,671

)

(5.3

)%

$

(159

)

(0.4

)%

$

(3,072

)

(1.8

)%

$

1,791

 

1.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

(2,062

)

(3.0

)%

$

1,061

 

2.8

%

$

358

 

0.2

%

$

4,985

 

4.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

29,478

 

100.0

%

$

22,479

 

100.0

%

$

74,802

 

100.0

%

$

63,470

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

12,406

 

42.1

 

9,688

 

43.1

 

32,761

 

43.8

 

26,989

 

42.5

 

Operating, administrative and other

 

13,040

 

44.2

 

12,485

 

55.5

 

36,305

 

48.5

 

31,554

 

49.7

 

Depreciation and amortization

 

950

 

3.2

 

830

 

3.7

 

2,438

 

3.3

 

2,352

 

3.7

 

Equity income from unconsolidated subsidiaries

 

(35

)

(0.1

)

(321

)

(1.4

)

(164

)

(0.2

)

(849

)

(1.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

3,117

 

10.6

%

$

(203

)

(0.9

)%

$

3,462

 

4.6

%

$

3,424

 

5.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

4,067

 

13.8

%

$

627

 

2.8

%

$

5,900

 

7.9

%

$

5,776

 

9.1

%

 

EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization.  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 measurement 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 of America, or (ii) operating cash flow determined in accordance with accounting principles generally accepted in the United States of America.  The Company’s calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.

 

30



 

EBITDA is calculated as follows (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended Septmeber 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Americas

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

$

(19,804

)

$

21,524

 

$

15,486

 

$

48,679

 

Add: Depreciation and amortization

 

38,512

 

4,354

 

47,703

 

12,561

 

EBITDA

 

$

18,708

 

$

25,878

 

$

63,189

 

$

61,240

 

 

 

 

 

 

 

 

 

 

 

EMEA

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

$

(3,671

)

$

(159

)

$

(3,072

)

$

1,791

 

Add: Depreciation and amortization

 

1,609

 

1,220

 

3,430

 

3,194

 

EBITDA

 

$

(2,062

)

$

1,061

 

$

358

 

$

4,985

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

3,117

 

$

(203

)

$

3,462

 

$

3,424

 

Add: Depreciation and amortization

 

950

 

830

 

2,438

 

2,352

 

EBITDA

 

$

4,067

 

$

627

 

$

5,900

 

$

5,776

 

 

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

 

Americas

 

Revenue increased by $100.3 million or 44.7% for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002 primarily driven by the Insignia Acquisition as well as increased sales transaction revenue, lease transaction revenue and loan fees. The sales and lease transaction revenue increases were primarily due to an increased number of transactions and a higher average value per transaction.  Loan fees increased as a result of a higher number of deals and a higher average value per deal.  Cost of services increased by $55.1 million or 50.1% for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002 primarily driven by higher commission expense due to increased revenue as a result of the Insignia Acquisition as well as higher sales and lease transaction revenue.  Also contributing to the variance were increased payroll related costs, primarily insurance.  Cost of services as a percentage of revenue increased from 49.0% for the third quarter of the prior year to 50.9% for the third quarter of the current year. Operating, administrative and other expenses increased $38.3 million or 42.2% mainly due to increased costs as a result of the Insignia Acquisition, including integration expenses of $1.2 million, as well as higher bonuses and payroll related costs.  Included in the 2003 bonus amount was an accrual for a one-time performance award of approximately $1.9 million.

 

EMEA

 

Revenue increased by $31.1 million or 81.4% for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002.  This was mainly driven by increased revenue as a result of the Insignia Acquisition as well as higher sales and lease transaction revenue across Europe. Cost of services increased $14.7 million or 91.6% as a result of higher producer compensation expense and increased payroll related costs, including pension and insurance expenses, partially due to the Insignia Acquisition as well as a result of new hires.  Operating, administrative and other expenses increased by $16.9 million or 80.1% mainly due to increased costs as a result of the Insignia Acquisition as well as higher payroll related expenses and bonuses.  In addition, occupancy expense was higher in the UK as a result of the Company’s relocation to a new facility.

 

Asia Pacific

 

Revenue increased by $7.0 million or 31.1% for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002.  The increase was primarily driven by an overall increase in revenue in Australia and New Zealand.  Cost of services increased by $2.7 million or 28.0% mainly driven by increased transaction revenue as well as higher producer compensation expense due to increased headcount in Australia and New Zealand. Operating, administrative and other expenses increased by $0.6 million or 4.4% primarily due to an increased accrual for long-term incentives in Australia and New Zealand.

 

31



 

Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September 30, 2002

 

Americas

 

Revenue increased by $148.3 million or 24.0% for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002 primarily driven by the Insignia Acquisition as well as significantly higher sales transaction revenue due to an increased number of transactions and a higher average value per transaction.  Cost of services increased by $89.8 million or 30.8% for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002 due to increased revenue as a result of the Insignia Acquisition and higher sales transaction revenue, as well as increased payroll related costs, primarily insurance. As a result, cost of services as a percentage of revenue increased from 47.1% for the nine months ended September 30, 2002 to 49.7% for the nine months ended September 30, 2003. Operating, administrative and other expenses increased $44.5 million or 16.4% mainly caused by higher costs as a result of the Insignia Acquisition, including integration expenses of $1.2 million, as well as increased bonuses and payroll related costs.  Included in the 2003 bonus amount was an accrual for a one-time performance award of approximately $6.9 million.  These increases were partially offset by net foreign currency transaction gains resulting from the weakened U.S. dollar.

 

EMEA

 

Revenue increased by $55.4 million or 49.6% for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002.  This was mainly driven by increased revenue as a result of the Insignia Acquisition as well as higher sales and lease transaction revenue across Europe.  Cost of services increased $25.8 million or 56.9% as a result of higher producer compensation expense and increased payroll related costs, including pension and insurance expenses, partially due to the Insignia Acquisition and new hires.  Operating, administrative and other expenses increased by $29.9 million or 48.8% mainly driven by increased costs as a result of the Insignia Acquisition as well as higher bonus, payroll related and consulting expenses.  In addition, occupancy expense was higher in the UK as a result of the Company’s relocation to a new facility.

 

Asia Pacific

 

Revenue increased by $11.3 million or 17.9% for the nine months ended September 30, 2003 as compared to the nine months ended September 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. Cost of services increased by $5.8 million or 21.4% mainly attributable to increased transaction revenue as well as higher producer compensation expense due to increased headcount in Australia and New Zealand. Operating, administrative and other expenses increased by $4.8 million or 15.1% 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 May 28, 2003 (the Insignia Acquisition Agreement), by and among the Company, CBRE, Apple Acquisition Corp. (Apple Acquisition), a Delaware corporation and wholly owned subsidiary of CBRE, and Insignia Financial Group, Inc. (Insignia), Apple Acquisition was merged with and into Insignia (the Insignia Acquisition).  Insignia was the surviving corporation in the Insignia Acquisition and at the effective time of the Insignia Acquisition became a wholly owned subsidiary of CBRE.

 

In conjunction with and immediately prior to the Insignia Acquisition, Island Fund I LLC (Island), a Delaware limited liability company, which is affiliated with Andrew L. Farkas, Insignia’s former Chairman and Chief Executive Officer, and some of Insignia’s other former officers, completed the purchase of specified real estate investment assets of Insignia, pursuant to a Purchase Agreement, dated May 28, 2003 (the Island Purchase Agreement), by and among Insignia, the Company, CBRE, Apple Acquisition and Island.  A number of the real estate investment assets that were sold to Island required the consent of one or more third parties in order to transfer such assets.  Some of these third party consents were not obtained prior to the closing of the Insignia Acquisition.  As a result, the Company continues to hold these real estate investment assets pending the receipt of these third party consents.  While the Company holds these assets, it has generally agreed to provide Island with the economic benefits from these assets and Island generally has agreed to indemnify the Company with respect to any losses incurred in connection with continuing to hold these assets.

 

32



 

Pursuant to the terms of the Insignia Acquisition Agreement, (1) each issued and outstanding share of Insignia’s 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), (2) 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, (3) all outstanding warrants and options to acquire Insignia Common Stock 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 (4) 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 (a) 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 (b) 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.

 

The funding to complete the Insignia Acquisition, as well as the refinancing of substantially all of the outstanding indebtedness of Insignia, was obtained through (a) 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, (b) 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 and DLJIP II Holdings, L.P., a Delaware limited partnership, for an aggregate cash purchase price of $3,645,840, (c) 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, (d) 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, (e) 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 the 9¾% Senior Notes due May 15, 2010 (the 9¾% Senior Notes), which had been issued and sold by CBRE Escrow on May 22, 2003, (f) $75.0 million of term loan borrowings under the Amended and Restated Credit Agreement dated as of May 22, 2003, by and among CBRE, Credit Suisse First Boston (CSFB) as Administrative Agent and Collateral Agent, the other lenders named in the credit agreement, the Company and the guarantors named in the credit agreement and (g) $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 $70.7 million for the nine months ended September 30, 2003, an increase of $51.7 million compared to the nine months ended September 30, 2002.  This increase was primarily attributable to merger-related expenses paid in the current period as well as due to the timing of payments to vendors and taxing authorities.

 

Net cash used in investing activities totaled $252.7 million for the nine months ended September 30, 2003, an increase of $236.2 million compared to the same period of the prior year. This increase was primarily due to costs incurred in the current year associated with the Insignia Acquisition.

 

Net cash provided by financing activities totaled $328.5 million for the nine months ended September 30, 2003 compared to net cash used in financing activities of $2.1 million for the nine months ended September 30,

 

33



 

2002.  This increase was mainly attributable to the additional net debt and equity financing resulting from the Insignia Acquisition in the current year.

 

The Company issued $200.0 million in aggregate principal amount of 9¾% Senior Notes due May 15, 2010 on May 22, 2003. The 9¾% Senior Notes are unsecured obligations, and rank equal in right of payment with existing and future senior indebtedness and senior in right of payment to any existing and future subordinated indebtedness of the Company. The 9¾% Senior Notes are jointly and severally guaranteed on a senior basis by the Company and its domestic subsidiaries. Interest accrues at a rate of 9¾% per year 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 September 30, 2003.

 

In accordance with the terms of the debt offering of the 9¾% Senior Notes, the proceeds from the sale of the 9¾% Senior Notes were placed in escrow on May 22, 2003.  The proceeds were released from this escrow account on July 23, 2003, the date of the Insignia Acquisition.

 

In connection with the Insignia Acquisition, the Company entered into an amended and restated credit agreement with CSFB and other lenders (the Credit Facility).  On October 14, 2003, the Company refinanced all of the outstanding loans under the amended and restated credit agreement it entered into in connection with the completion of the Insignia Acquisition.  As part of this refinancing, the Company entered into a new amended and restated credit agreement.  The prior credit facilities were, and the current amended and restated credit facilities continue 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 facilities entered into in connection with the Insignia Acquisition included the following: (1) a Tranche A term facility of $50.0 million maturing on July 20, 2007, which was fully drawn in connection with the 2001 merger; (2) a Tranche B term facility of $260.0 million maturing on July 18, 2008, $185.0 million of which was drawn in connection with the 2001 merger and $75.0 million of which was drawn in connection with the Insignia Acquisition; and (3) 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 in connection with the Insignia Acquisition, borrowings under the Tranche A and revolving facility bore 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 ratio of total debt less available cash to EBITDA, which is defined in the amended and restated credit agreement.  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.  After the amendment and restatement in connection with the Insignia Acquisition, borrowings under the Tranche B facility bore 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%.

 

In connection with the October 14, 2003 refinancing of the senior secured credit facilities and the signing of a new amended and restated credit agreement, the former Tranche A term facility and Tranche B term facility were combined into a new single term loan facility.  The new term loan facility, of which $300.0 million was drawn on October 14, 2003, requires quarterly principal payments of $2.5 million through September 30, 2008 and matures on December 31, 2008.  Borrowings under the new term loan facility bear interest at varying rates based at the Company’s option, on either LIBOR plus 3.25% or the alternate base rate plus 2.25%.  The maturity date and interest rate for borrowings under the revolving credit facility remain unchanged in the new amended and restated credit agreement.  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 July 23, 2003.  The total amounts outstanding under the Credit Facility included in senior secured term loans and current maturities of long-term debt in the accompanying consolidated balance sheets were $288.5 million and $221.0 million as of September 30, 2003 and December 31, 2002, respectively.

 

The Company issued $229.0 million in aggregate principal amount of 11¼% Senior Subordinated Notes due June 15, 2011 (the 11¼% Senior Subordinated Notes), for approximately $225.6 million, net of discount, on June 7,

 

34



 

2001. The 11¼% Senior Subordinated Notes are jointly and severally guaranteed on a senior subordinated basis by the Company and its domestic subsidiaries.  The 11¼% Senior Subordinated 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 11¼% Senior Subordinated 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 11¼% Senior Subordinated Notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest.  The amount of the 11¼% Senior Subordinated Notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $226.1 million and $225.9 million as of September 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% Senior Notes due on July 20, 2011 (the 16% Senior Notes).  The 16% 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 16% 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 September 30, 2003, the redemption price was 109.6% of par.  In the event of a change in control, the Company is obligated to make an offer to purchase all of the outstanding 16% Senior Notes at 101.0% of par. The total amount of the 16% Senior Notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $63.4 million and $61.9 million as of September 30, 2003 and December 31, 2002, respectively.

 

On October 27, 2003, the Company redeemed $20.0 million in aggregate principal amount of its 16% Senior Notes. The Company paid a $1.9 million premium in connection with this redemption.

 

The 16% Senior Notes are solely the Company’s obligation to repay.  CBRE has neither guaranteed nor pledged any of its assets as collateral for the 16% Senior Notes, and is not obligated to provide cash flow to the Company for repayment of these 16% 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 16% Senior Notes.  The Company will depend on CBRE’s cash flows to fund principal and interest payments as they come due.

 

The 9¾% Senior Notes, the Credit Facility, the 11¼% Senior Subordinated Notes and the 16% 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, enter into sale/leaseback transactions, issue subsidiary equity and enter into consolidations or mergers.  The amendment and restatement of the Credit Facility modified the financial covenant ratios to provide a greater degree of flexibility than the prior Credit Facility.  The amended and restated Credit Facility requires the Company to maintain a minimum coverage ratio of interest and certain fixed charges and a maximum leverage and senior secured 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.  On September 30, 2003, in connection with the refinancing of the outstanding senior secured credit facilities, Standard and Poor’s confirmed the B+ rating of the senior secured term loans.  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 a Third Amended and Restated Warehousing Credit and Security Agreement effective December 20, 2002.  The

 

35



 

agreement provided for a revolving line of credit of $200.0 million, bore interest at the lower of one-month LIBOR or 2.0% (RFC Base Rate) plus 1.0% and expired on August 31, 2003. On June 25, 2003, the agreement was 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 expired on August 30, 2003 and to change the RFC Base Rate to one-month LIBOR plus 1.0%.  By amendment on August 29, 2003, the expiration date of the agreement was extended to September 25, 2003.  On September 26, 2003, the Company entered into a Fourth Amended and Restated Warehousing Credit and Security Agreement.  The agreement provides for a revolving line of credit of up to $200.0 million, bears interest at one-month LIBOR plus 1.0% and expires on August 31, 2004.

 

During the three months ended September 30, 2003, the Company had a maximum of $272.5 million revolving line of credit principal outstanding with RFC.  At September 30, 2003 and December 31, 2002, respectively, the Company had a $135.8 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 $135.8 million and a $63.1 million warehouse receivable, which are also included in the accompanying consolidated balance sheets as of September 30, 2003 and December 31, 2002, respectively.

 

In connection with the Insignia Acquisition, the Company assumed $13.8 million of acquisition loan notes that were issued in connection with previous acquisitions by Insignia in the United Kingdom (UK).  The acquisition loan notes are payable to sellers of the formerly acquired UK businesses and are secured by restricted cash deposits in approximately the same amount.  The acquisition loan notes are redeemable semi-annually at the discretion of the note holder and have a final maturity date of April 2010.  At September 30, 2003, the Company had $13.9 million in acquisition loan notes outstanding, which are included in short-term borrowings in the accompanying consolidated balance sheets.

 

In connection with the Insignia Acquisition, on July 23, 2003 the Company assumed and immediately repaid Insignia’s outstanding revolving credit facility of $28.0 million and subordinated credit facility of $15.0 million.

 

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 September 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.  During the third quarter of 2003, the maturity date on this non-recourse debt was extended to July 31, 2008.  At September 30, 2003 and December 31, 2002, respectively, the Company had $40.4 million of non-recourse debt included in other long-term debt and $40.0 million of non-recourse included in short-term borrowings in the accompanying consolidated balance sheets.  Additionally, during the third quarter of 2003, through this joint venture the Company incurred additional non-recourse debt of $1.9 million with a maturity date of June 15, 2004.  At September 30, 2003, this $1.9 million of non-recourse debt is included in short-term borrowings in the accompanying consolidated balance sheet.

 

The following is a summary of the Company’s various contractual obligations as of September 30, 2003, except for operating leases which are as of December 31, 2002 (dollars in thousands):

 

Contractual Obligations

 

Payments Due by Period

 

 

 

Total

 

Less than 1
year

 

1-3 years

 

3-5 years

 

More than
5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt (1) (2)

 

$

994,887

 

$

175,511

 

$

22,774

 

$

296,842

 

$

499,760

 

Operating leases (3)

 

694,391

 

98,839

 

167,097

 

126,913

 

301,542

 

Deferred compensation plan liability (4)

 

125,465

 

 

 

 

125,465

 

Pension liability (4)

 

31,559

 

 

 

 

31,559

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Contractual Obligations

 

$

1,846,302

 

$

274,350

 

$

189,871

 

$

423,755

 

$

958,326

 

 

Other Commitments

 

Amount of Commitments Expiration

 

 

 

Total

 

Less than 1
year

 

1-3 years

 

3-5 years

 

More than
5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Letters of credit (5)

 

$

27,797

 

$

27,797

 

$

 

$

 

$

 

Guarantees (5)

 

10,506

 

10,506

 

 

 

 

Co-investment commitments (5)

 

21,370

 

15,462

 

5,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Commitments

 

$

59,673

 

$

53,765

 

$

5,908

 

$

 

$

 

 


(1)          Includes capital lease obligations.  See Note 11 of the Notes to Consolidated Financial Statements.

 

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(2)          As described in greater detail in Note 19 of the Notes to the Consolidated Financial Statements, on October 14, 2003, the Company refinanced its senior secured credit facilities, which, among other things, increased the amount of outstanding term loans and changed the amortization schedule for the term loans.

(3)          Includes the Company’s outstanding operating lease obligations as of December 31, 2002 as well as Insignia’s outstanding operating lease obligations as of December 31, 2002 reported on their annual report on form 10-K for the year ended December 31, 2002.

(4)          An undeterminable portion of this amount will be paid in years one through five.

(5)          See Note 12 of the Notes to Consolidated Financial Statements.

 

Early in the fourth quarter of 2003, the Company announced that effective January 1, 2004, it will close the Deferred Compensation Plan (DCP) to new participants.  During 2004, the DCP will continue to accept compensation deferrals from participants who currently have a balance, meet the eligibility requirements and elect to participate, up to a maximum annual contribution amount of $250,000 per participant.  However, the DCP will cease accepting compensation deferrals from current participants effective January 1, 2005.

 

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 September 30, 2003, the Company had foreign currency exchange forward contracts with an aggregate notional amount of $26.5 million, which mature on various dates through December 31, 2003.  The net impact on the Company’s earnings for the three and nine months ending September 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.

 

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.

 

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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 acquired in the 2001 Merger and in the Insignia Acquisition.  Other intangible assets include a trademark, which was separately identified as a result of the 2001 Merger, as well as a trade name separately identified as a result of the Insignia Acquisition representing the Richard Ellis trade name in the UK that was owned by Insignia prior to the Insignia Acquisition.  Both the trademark and the trade name are not being amortized and have indefinite estimated useful lives.  Other intangible assets also include backlog, which represents the fair value of Insignia’s net revenue backlog as of July 23, 2003 that was acquired as part of the Insignia Acquisition.  The backlog consists of the net commission receivable on Insignia’s revenue producing transactions, which were at various stages of completion prior to the Insignia Acquisition.  Backlog is being amortized as cash is received or upon final closing of these pending transactions.  The remaining other intangible assets primarily include management contracts, loan servicing rights, producer employment contracts, franchise agreements and a trade name, which are all being 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 impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows.  The Company completed its required annual impairment test as of October 1, 2002 and determined that no impairment existed.  The Company is in the process of completing its annual impairment test as of October 1, 2003.

 

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.  Initially, the consolidation requirements applied to existing VIEs in the first fiscal year or interim period beginning after June 15,

 

38



 

2003.  On October 9, 2003, the effective date of FIN 46 was deferred until the end of the first interim or annual period ending after December 15, 2003 for VIEs created on or before January 31, 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 has not had and 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 has not had a material impact on the Company’s financial position or results of operations.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company’s existing financial instruments effective July 1, 2003. On October 29, 2003, the FASB deferred indefinitely the provisions of paragraphs 9 and 10 and related guidance in the appendices of this pronouncement as they apply to mandatorily redeemable noncontrolling interests.  The adoption of the effective provisions of SFAS No. 150 have not had 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 28% 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 appropriate.   The Company does not engage in any speculative activities with respect to foreign currency.  At September 30, 2003, the Company had foreign currency exchange forward contracts with an aggregate notional amount of $26.5 million, which mature on various dates through December 31, 2003.  The net impact on the Company’s earnings for the three and nine months ended September 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’s fixed and variable rate debt at September 30, 2003 consisted of the following (dollars in thousands):

 

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Year of Maturity

 

Fixed

Rate

 

One-Month

Yen LIBOR
+3.5%

 

One-Month
LIBOR
+1.0%

 

Three-Month
LIBOR
+3.25%

 

Three-Month
LIBOR
+3.75%

 

Six-Month

GBP LIBOR
- 1.0%

 

Interest Rate

Range of
1.0% to 6.25%

 

Total

 

2003

 

$

467

 

$

 

$

135,820

 

$

2,188

 

$

650

 

$

13,881

 

$

12,102

 

$

165,108

 

2004

 

1,948

 

 

 

8,750

 

2,600

 

 

 

13,298

 

2005

 

17

 

 

 

8,750

 

2,600

 

 

 

11,367

 

2006

 

17

 

 

 

8,750

 

2,600

 

 

 

11,367

 

2007

 

17

 

 

 

4,375

 

2,600

 

 

 

6,992

 

2008

 

2,023

 

40,389

 

 

 

2,600

 

 

 

45,012

 

Thereafter (1)

 

499,743

 

 

 

 

242,000

 

 

 

741,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

504,232

 

$

40,389

 

$

135,820

 

$

32,813

 

$

255,650

 

$

13,881

 

$

12,102

 

$

994,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Interest Rate

 

11.2

%

3.9

%

2.1

%

4.4

%

4.9

%

1.5

%

6.0

%

7.6

%

 


(1)          Primarily includes the 11¼% Senior Subordinated Notes, the 9¾% Senior Notes, the 16% Senior Notes and the Tranche B term loans under the senior secured credit facilities.

 

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 September 30, 2003, the net impact would be a decrease of $1.5 million on pre-tax income and cash provided by operating activities for the nine months ending September 30, 2003.

 

Based on dealers’ quotes at September 30, 2003, the estimated fair value’s of the Company’s $200.0 million 9¾% Senior Notes and the $ 226.1 million 11¼% Senior Subordinated Notes were $216.0 million and $244.2 million, respectively.  There was no trading activity for the 16% Senior Notes, which have an effective interest rate of 17.8% and are due in 2011.  The carrying value of the 16% Senior Notes as of September 30, 2003 totaled $63.4 million.  Estimated fair values for the term loans under the senior secured credit facilities and the remaining long-term debt are not presented because the Company believes that they are not materially different from book value, primarily because the majority of the remaining debt is based on variable rates that approximate terms that could be obtained at September 30, 2003.

 

As described in greater detail in Note 19 of the Notes to Consolidated Financial Statements, on October 14, 2003, the Company refinanced its senior secured credit facilities, which included an increase in the amount of outstanding term loans, as well as changes to the amortization schedules, maturities and interest rates of the term loans.

 

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 its 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, 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.

 

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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 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

 

(a)   Not applicable

 

(b)   Not applicable

 

(c)          On July 23, 2003, the Company issued and sold the following equity securities pursuant to the Section 4(2) exemption from the registration requirements of the Securities Act of 1933, as amended:

 

               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

 

               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

 

               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

 

               60,000 shares of the Company’s Class B Common Stock to Frederic V. Malek for an aggregate cash purchase price of $960,000

 

The cash proceeds received by the Company from these issuances of shares of Class A and Class B common stock, together with borrowings under a new credit agreement and the cash proceeds received from the issuance of 9¾% Senior Notes due May 15, 2010, were used to consummate the Insignia Acquisition.

 

(d)   Not applicable

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Annual Meeting of Stockholders was held on September 16, 2003.  The stockholders elected the following nine directors to serve one-year terms:

 

                  Richard Blum

                  Jeffrey Cozad

                  Bradford Freeman

                  Frederick Malek

                  Claus Moller

                  Jeffrey Pion

                  Brett White

                  Gary Wilson

                  Raymond Wirta

 

Each director nominee received 148,275,351 votes, constituting all votes cast by identifiable stockholders.  Additional proxies were received by the Company from stockholders that could not be identified from the

 

41



 

information on the proxy.  All such proxies voted in favor of each director nominee, except for a single stockholder who abstained.  The votes received from identifiable stockholders constituted 76% of the maximum number of votes that could be cast and were sufficient for the election of directors.  There were no other abstentions or broker non-votes.

 

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                      Exhibits

 

Exhibit
Number

 

Description

 

 

 

2.1*

 

Amended and Restated Agreement and Plan of Merger, dated May 28, 2003, by and among CBRE Holding (the “Company”), CB Richard Ellis Services (CBRE), Apple Acquisition Corp. (Apple Acquisition), a Delaware corporation and wholly owned subsidiary of CBRE and Insignia Financial Group Inc. (Insignia) (incorporated by reference to Exhibit 2.2 to CBRE’s Registration Statement on Form S-4 filed on October 20, 2003).

2.2*

 

Purchase Agreement, dated May 28, 2003, by and among the Company, CBRE, Apple Acquisition and Insignia (incorporated by reference to Exhibit 2.3 to CBRE’s Registration Statement on Form S-4 filed on October 20, 2003).

4.1*

 

Indenture, dated May 22, 2003, among CBRE Escrow, Inc. and U.S. Bank National Association, as Trustee, for 9¾% Senior Notes due May 15, 2010 (incorporated by reference to Exhibit 4.1 to CBRE’s Registration Statement on Form S-4 filed on October 20, 2003)

10.1

 

Amended and Restated Credit Agreement dated October 14, 2003, by and among CBRE, the Company, and Credit Suisse First Boston.

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2003.

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2003.

32

 

Certifications by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes – Oxley Act of 2003.

 


*              Incorporated by reference.

 

(b)                       Reports on Form 8-K

 

The registrant filed a Current Report on Form 8-K on August 18, 2003 with regard to the Company’s conference call on August 11, 2003 discussing the operating results for the second quarter of 2003.

 

The registrant filed a Current Report on Form 8-K on August 11, 2003 furnishing a press release issued on August 11, 2003 discussing the Company’s operating results for the second quarter of 2003.

 

The registrant filed a Current Report on Form 8-K on August 7, 2003 to announce the consummation of the Company’s acquisition of Insignia Financial Group, Inc. (“Insignia”) on July 23, 2003.

 

The registrant filed a Current Report on Form 8-K on July 9, 2003 with regard to a press release issued on July 8, 2003 announcing that the Company and Insignia had reached an agreement in principle with certain stockholders of Insignia providing for the settlement of purported class action litigation recently commenced by such stockholders.

 

42



 

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:  November 14, 2003

/s/   KENNETH J. KAY

 

 

Kenneth J. Kay

 

Chief Financial Officer

 

43