UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2004

 

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 001 - 32205

 

CB RICHARD ELLIS GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

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

 

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

 

The number of shares of Class A common stock outstanding at July 30, 2004 was 69,299,920.

 

 

FORM 10-Q

 

June 30, 2004

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003
	Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 (Unaudited)
	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 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.	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
Signatures

 

2

 

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

		June 30, 2004			December 31, 2003
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	179,592		$	163,881
Restricted cash		12,044			14,899
Receivables, less allowance for doubtful accounts of $17,444 and $16,181 at June 30, 2004 and December 31, 2003, respectively		295,256			322,416
Warehouse receivable		219,935			230,790
Prepaid expenses		23,687			22,854
Deferred tax assets, net		67,786			57,681
Other current assets		35,655			26,461
Total Current Assets		833,955			838,982
Property and equipment, net		123,384			113,569
Goodwill		825,056			819,558
Other intangible assets, net of accumulated amortization of $84,759 and $73,449 at June 30, 2004 and December 31, 2003, respectively		121,238			131,731
Deferred compensation assets		79,094			76,389
Investments in and advances to unconsolidated subsidiaries		75,993			68,361
Deferred tax assets, net		35,442			32,179
Other assets, net		124,914			132,712
Total Assets		$	2,219,076		$	2,213,481
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	181,531		$	189,787
Compensation and employee benefits payable		146,660			148,874
Accrued bonus and profit sharing		126,503			200,343
Short-term borrowings:
Warehouse line of credit		219,935			230,790
Other		28,618			39,347
Total short-term borrowings		248,553			270,137
Current maturities of long-term debt		13,029			11,285
Other current liabilities		13,314			12,991
Total Current Liabilities		729,590			833,417
Long-Term Debt:
11¼% senior subordinated notes, net of unamortized discount of $2,456 and $2,827 at June 30, 2004 and December 31, 2003, respectively		204,913			226,173
Senior secured term loan		268,200			287,500
9¾% senior notes		200,000			200,000
16% senior notes, net of unamortized discount of $2,516 and $2,844 at June 30, 2004 and December 31, 2003, respectively		35,800			35,472
Other long-term debt		43,437			42,275
Total Long-Term Debt		752,350			791,420
Deferred compensation liability		143,846			138,037
Pension liability		36,715			35,998
Other liabilities		95,215			75,024
Total Liabilities		1,757,716			1,873,896
Minority interest		8,163			6,656
Commitments and contingencies
Stockholders’ Equity:
Class A common stock; $0.01 par value; 325,000,000 shares authorized; 68,973,443 and 7,561,499 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively		690			76
Class B common stock; $0.01 par value; 100,000,000 shares authorized; 53,409,556 shares issued and outstanding at December 31, 2003; no shares authorized, issued or outstanding at June 30, 2004		—			534
Additional paid-in capital		498,904			361,522
Notes receivable from sale of stock		(5,350		)	(4,680		)
Accumulated (deficit) earnings		(12,154		)	1,449
Accumulated other comprehensive loss		(26,581		)	(23,780		)
Treasury stock at cost, 405,883 and 385,103 shares at June 30, 2004 and December 31, 2003, respectively		(2,312		)	(2,192		)
Total Stockholders’ Equity		453,197			332,929
Total Liabilities and Stockholders’ Equity		$	2,219,076		$	2,213,481

 

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

 

3

 

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Revenue		$	550,916		$	321,717		$	991,908		$	585,441
Costs and expenses:
Cost of services		272,611			153,066			496,833			276,665
Operating, administrative and other		230,539			137,421			429,790			263,596
Depreciation and amortization		10,830			6,329			27,661			12,500
Merger-related charges		11,574			3,310			21,534			3,310
Operating income		25,362			21,591			16,090			29,370
Equity income from unconsolidated subsidiaries		2,768			3,801			5,294			6,864
Interest income		1,950			701			4,257			1,776
Interest expense		23,175			16,940			43,854			31,264
Income (loss) before provision (benefit) for income taxes		6,905			9,153			(18,213		)	6,746
Provision (benefit) for income taxes		3,940			3,981			(4,610		)	2,921
Net income (loss)		$	2,965		$	5,172		$	(13,603	)	$	3,825
Basic income (loss) per share		$	0.05		$	0.12		$	(0.22	)	$	0.09
Weighted average shares outstanding for basic income (loss) per share		63,990,494			41,683,699			63,256,275			41,667,644
Diluted income (loss) per share		$	0.04		$	0.12		$	(0.22	)	$	0.09
Weighted average shares outstanding for diluted income (loss) per share		69,375,929			42,523,893			63,256,275			42,462,801

 

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

 

4

 

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

		Six Months Ended June 30,
		2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(13,603	)	$	3,825
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		27,661			12,500
Amortization and write-off of deferred financing costs		3,533			1,793
Amortization and write-off of long-term debt discount		699			247
Deferred compensation deferrals		8,712			4,336
Gain on sale of servicing rights and other assets		(2,396		)	(1,874		)
Equity income from unconsolidated subsidiaries		(5,294		)	(6,864		)
Provision for doubtful accounts		2,759			1,905
Deferred income tax benefit		(4,609		)	(106		)
Decrease in receivables		16,165			9,113
Increase in deferred compensation assets		(2,705		)	(5,892		)
Decrease (increase) in prepaid expenses and other assets		13,652			(7,210		)
Decrease in compensation and employee benefits payable and accrued bonus and profit sharing		(73,018		)	(59,651		)
Decease in accounts payable and accrued expenses		(16,132		)	(14,864		)
Decrease in income tax payable		(5,769		)	(17,540		)
Increase in other liabilities		8,900			4,639
Other operating activities, net		2,350			1,088
Net cash used in operating activities		(39,095		)	(74,555		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of concessions received		(22,134		)	(1,171		)
Acquisition of businesses including net assets acquired, intangibles and goodwill, net of cash acquired		(4,957		)	1,343
Other investing activities, net		1,417			2,224
Net cash (used in) provided by investing activities		(25,674		)	2,396
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver and swingline credit facility		186,750			140,600
Repayment of revolver and swingline credit facility		(186,750		)	(129,350		)
Repayment of senior secured term loan		(17,500		)	(4,675		)
(Repayment of) proceeds from euro cash pool loan and other loans, net		(10,815		)	7,330
Repayment of 11¼% senior notes		(21,631		)	—
Proceeds from issuance of common stock, initial public offering, net		135,000			—
Other financing activities, net		(2,367		)	266
Net cash provided by financing activities		82,687			14,171
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		17,918			(57,988		)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD		163,881			79,701
Effect of currency exchange rate changes on cash		(2,207		)	1,305
CASH AND CASH EQUIVALENTS, AT END OF PERIOD		$	179,592		$	23,018
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized		$	44,440		$	26,570
Income taxes, net of refunds		$	6,685		$	19,535

 

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

 

5

 

CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Nature of Operations

 

CB Richard Ellis Group, Inc., formerly known as CBRE Holding, Inc. (which may be referred to in this Form 10-Q as “we,” “us,” and “our”), offers a full range of services to occupiers, owners, lenders and investors in office, retail, industrial, multi-family and other commercial real estate markets globally under the “CB Richard Ellis” brand name. Our business is focused on several service competencies, including strategic advice and execution assistance for property leasing and sales; property valuations; commercial mortgage origination and servicing, facilities and property management; real estate investment management and real estate econometric forecasting. We generate revenues both on a per project or transaction basis and from annual management fees.

 

CB Richard Ellis Group, Inc. was incorporated on February 20, 2001 and was 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, we were a wholly owned subsidiary of Blum Strategic Partners, L.P., which is an affiliate of Richard C. Blum, a director of CBRE and our company.

 

On July 20, 2001, we acquired all of the outstanding stock of CBRE pursuant to an Amended and Restated Agreement and Plan of Merger, dated May 31, 2001, among CBRE, Blum CB Corp. (Blum CB) and us. Blum CB was merged with and into CBRE with CBRE being the surviving corporation (the 2001 Merger). On July 23, 2003, our global position in the commercial real estate services industry was further solidified as CBRE acquired Insignia Financial Group, Inc.

 

2.              Initial Public Offering

 

On June 15, 2004, we completed the initial public offering of shares of our Class A common stock (the IPO).  In connection with the IPO, we issued and sold 7,726,764 shares of our Class A common stock and received aggregate net proceeds of approximately $135.0 million, after deducting underwriting discounts and commissions and offering expenses payable by us.  Also in connection with the IPO, selling stockholders sold an aggregate of 16,273,236 shares of our Class A common stock and received net proceeds of approximately $290.6 million, after deducting underwriting discounts and commissions.  We did not receive any of the proceeds from the sale of shares by the selling stockholders.

 

3.              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 us, 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 aggregate preliminary purchase price for the acquisition of Insignia was approximately $329.1 million, which includes: (1) $267.9 million in cash paid for shares of Insignia’s outstanding common stock, at $11.156 per share, (2) $38.2 million in cash paid for Insignia’s outstanding Series A preferred stock and Series B preferred stock at $100.00 per share plus accrued and unpaid dividends, (3) cash payments of $7.9 million to holders of Insignia’s vested and unvested warrants and options and (4) $15.1 million of direct costs incurred in connection with the acquisition, consisting mostly of legal and accounting fees.

 

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. Given the size and complexity of the acquisition, the fair valuation of certain assets is still preliminary.  Accordingly, the final valuation of the net assets acquired is expected to be completed during the third quarter of 2004.  Additionally, adjustment to the estimated liabilities assumed in connection with the Insignia Acquisition may still be required.

 

6

 

During the six months ended June 30, 2004, we made the following significant adjustments to goodwill:

 

•                  In the first quarter of 2004, we assigned a $6.6 million estimated fair value to a broker draw asset acquired from Insignia. Based on our management’s estimates, we generally derive benefit from brokers participating in our draw program over two years. Accordingly, we estimate that we will derive benefit from the broker draw asset related to Insignia’s brokers over two years from the date of the Insignia Acquisition and, accordingly, we are amortizing it on a straight-line basis, which reflects the pattern in which the economic benefits of the broker draw asset are consumed, during that period. The allocation of purchase price to the broker draw asset, net of related tax impact, resulted in a $3.8 million decrease in goodwill and a related $1.9 million increase in net loss during the six months ended June 30, 2004, which includes a $0.8 million adjustment to correct the amortization taken for the period from the date of the Insignia Acquisition through December 31, 2003.

 

•                  During the six months ended June 30, 2004, we recorded a $15.4 million increase to goodwill due to an increase in liabilities primarily related to additional lease termination costs, contract termination costs and severance payments in excess of amounts previously accrued. All such adjustments were recorded in accordance with the requirements of Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” As of the consummation date of the acquisition of Insignia, our management began to assess and formulate a plan to close certain Insignia locations.  Due to the size of this acquisition and the dispersed nature of Insignia’s operations, a significant amount of time and effort was required to finalize plans with respect to closures, analyze the provisions of contracts to be terminated and estimate the total exit costs. The adjustment during the six months ended June 30, 2004 represents a change in estimate as we completed our assessments and finalized our plans with respect to certain of the locations. Consistent with the requirements of EITF Issue No. 95-3, finalization of our plans for all Insignia closures will be completed within one year of the consummation date of the acquisition.

 

•                  In the first quarter of 2004, we recorded a $4.2 million increase to goodwill related to the sale of certain assets acquired in connection with the Insignia Acquisition. Of this amount, $3.7 million represented a receivable due from a buyer, which was relieved in the second quarter of 2004 as cash was received in May 2004 and applied to the balance.  During the second quarter of 2004, we received additional cash for the sale of such assets as well as finalized the fair value assigned to such assets in the purchase price allocation.  This resulted in a overall increase to goodwill of approximately $2.6 million, which reflects the sale of assets at an amount less than the value assigned in the preliminary purchase price allocation. As no event occurred during the period from the acquisition date to the sale date that would have impacted the value of these assets, our management concluded that the amount at which these assets were ultimately sold represents the best estimate of the value of these assets at the date of the Insignia Acquisition.

 

•                  During the second quarter of 2004, we finalized the fair value of liabilities assumed relating to annuities to former equity partners of Richard Ellis that are payable by Insignia until the times of their deaths.  Our valuations of these annuities was based in part on a third-party valuation and resulted in a $4.2 million increase in goodwill in 2004.

 

•                  During the six months ended June 30, 2004, we recorded a reduction of $15.0 million to goodwill related to the deferred tax impact of all purchase accounting adjustments recorded in 2004, excluding the deferred tax impact previously mentioned related to the broker draw asset.

 

7

 

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, we have accrued certain liabilities in accordance with EITF Issue No. 95-3. These liabilities assumed in connection with the Insignia Acquisition consist of the following (dollars in thousands):

 

		2003 Charge To Goodwill			2004 Adjustments			Utilized To Date			To be Utilized
Severance		$	30,706		$	524		$	(15,708	)	$	15,522
Lease termination costs		28,922			12,705			(7,135		)	34,492
Change of control payments		10,451			—			(10,451		)	—
Costs associated with exiting contracts		8,921			1,379			(8,862		)	1,438
Legal settlements anticipated		8,739			800			(3,032		)	6,507
		$	87,739		$	15,408		$	(45,188	)	$	57,959

 

4.              Basis of Presentation

 

The consolidated statements of operations and cash flows for the three and six months ended June 30, 2004 include full periods of activity for Insignia. However, the consolidated statements of operations and cash flows for the three and six months ended June 30, 2003 do not include any activity of Insignia, as the Insignia Acquisition occurred on July 23, 2003. As such, our consolidated financial statements after the Insignia Acquisition are not directly comparable to our consolidated financial statements prior to the Insignia Acquisition.

 

Pro forma results for the three and six months ended June 30, 2003, assuming the Insignia Acquisition had occurred as of January 1, 2003, are presented below.  These pro forma results have been prepared for comparative purposes only and include 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 incurred to finance the Insignia Acquisition.  These pro forma results do not purport to be indicative of what operating results would have been had the Insignia Acquisition occurred on January 1, 2003, and may not be indicative of future operating results (dollars in thousands, except share data).

 

 

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 six months ended June 30, 2004 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2004. The consolidated financial statements and notes to consolidated financial statements should be read in conjunction with our 2003 Annual Report on Form 10-K/A, which contains the latest

 

8

 

available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2003.

 

On May 4, 2004, we amended our Certificate of Incorporation increasing the authorized shares of Class A common stock to 325,000,000 and the authorized shares of Class B common stock to 100,000,000.  Also, on May 4, 2004, we effected a three-for-one split of our outstanding Class A common stock and Class B common stock, which split was effected by a stock dividend.  In addition, on June 7, 2004, we effected a 1-for-1.0825 reverse stock split of our outstanding Class A common stock and Class B common stock.  The applicable share and per share data for all periods included herein have been restated to give effect to these stock splits.  In connection with the completion of the IPO, all outstanding shares of Class B common stock were converted into an equal number of shares of Class A common stock.  On June 16, 2004, we amended our Certificate of Incorporation to eliminate the authorized shares of Class B common stock.

 

5.              Stock-Based Compensation

 

Prior to the fourth quarter of 2003, we accounted for our employee stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related Financial Accounting Standards Board (FASB) interpretations.  Accordingly, compensation cost for employee stock options was measured as the excess, if any, of the estimated market price of our Class A common stock at the date of grant over the amount an employee was required to pay to acquire the stock.

 

During the fourth quarter of 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” prospectively to all employee awards granted, modified or settled after January 1, 2003, as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123.”

 

In accordance with SFAS No. 123, we estimate the fair value of our options using the Black-Scholes option-pricing model, which takes into account assumptions such as the dividend yield, the risk-free interest rate, the expected stock price volatility and the expected life of the options.  As our Class A common stock was not freely tradeable on a national securities exchange or an over-the-counter market prior to the completion of the IPO, an effectively zero percent volatility was utilized for all periods ending prior to the IPO.  The dividend yield is excluded from the calculation, as it is our present intention to retain all earnings.  The following table illustrates the effect on net income (loss) and income (loss) per share if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except share data):

 

9

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Net income (loss) as reported		$	2,965		$	5,172		$	(13,603	)	$	3,825
Add:  Stock-based employee compensation  expense included in reported net income (loss), net of the related tax effect		53			—			106			—
Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards, net of the related tax effect		(190		)	(147		)	(387		)	(293		)
Pro forma net income (loss)		$	2,828		$	5,025		$	(13,884	)	$	3,532
Basic income (loss) per share:
As reported		$	0.05		$	0.12		$	(0.22	)	$	0.09
Pro forma		$	0.04		$	0.12		$	(0.22	)	$	0.08
Diluted income (loss) per share:
As reported		$	0.04		$	0.12		$	(0.22	)	$	0.09
Pro forma		$	0.04		$	0.12		$	(0.22	)	$	0.08

 

The weighted average fair value of options granted by us was $8.84 and $1.15 for the three months ended June 30, 2004 and 2003, respectively, and $5.62 and $1.58 for the six months ended June 30, 2004 and 2003, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, utilizing the following weighted average assumptions:

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2004		2003		2004		2003
Risk-free interest rate		3.92	%	2.37	%	3.58	%	2.98	%
Expected volatility		50.00	%	0.00	%	30.00	%	0.00	%
Expected life		5 years		5 years		5 years		5 years

 

Option valuation models require the input of subjective assumptions including the expected stock price volatility.  Because our 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, we do not believe that the Black-Scholes model necessarily provides a reliable single measure of the fair value of our employee stock options.

 

6.              Fair Value of Financial Instruments

 

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets.  Value is defined as the amount at which an instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale.  The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

Cash and Cash Equivalents:  This balance includes cash and cash equivalents with maturities of less than three months.  The carrying amount approximates fair value due to the short-term maturities of these instruments.

 

10

 

Short-Term Borrowings:  The majority of this balance represents the warehouse line of credit.  Due to their short-term maturities and variable interest rates, fair value approximates carrying value  (See Note 10).

 

11¼% Senior Subordinated Notes:  Based on dealers’ quotes, the estimated fair value of the 11¼% senior subordinated notes is $236.4 million and $256.5 million at June 30, 2004 and December 31, 2003, respectively.  Their actual carrying value totaled $204.9 million and $226.2 million at June 30, 2004 and December 31, 2003, respectively (See Note 10).

 

9¾% Senior Notes:  Based on dealers’ quotes, the estimated fair value of the 9¾% senior notes is $220.0 million and $222.0 million at June 30, 2004 and December 31, 2003, respectively.  Their actual carrying value totaled $200.0 million at June 30, 2004 and December 31, 2003 (See Note 10).

 

16% Senior Notes:  During the six months ended June 30, 2004, we were not aware of any trading activity for the 16% senior notes due 2011, and no dealer’s quote was available.  Their carrying value totaled $35.8 million and $35.5 million at June 30, 2004 and December 31, 2003, respectively (see Note 10).

 

Senior Secured Terms Loans & Other Long-Term Debt:  Estimated fair values approximate respective carrying values because a substantial majority of these instruments are based on variable interest rates (see Note 10).

 

7.              Restricted Cash

 

Included in the accompanying consolidated balance sheets as of June 30, 2004 and December 31, 2003, is restricted cash of $12.0 million and $14.9 million, respectively, which primarily consists of cash pledged to secure the guarantee of certain short-term notes issued in connection with previous acquisitions by Insignia in the United Kingdom (U.K.).  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 changes in the carrying amount of goodwill for us and each of our segments (See Note 18 for a description of our segments) for the six months ended June 30, 2004 are as follows (dollars in thousands):

 

		Americas			EMEA			Asia Pacific			Total
Balance at January 1, 2004		$	598,439		$	217,106		$	4,013		$	819,558
Purchase accounting adjustments related to acquisitions		711			3,993			794			5,498
Balance at June 30, 2004		$	599,150		$	221,099		$	4,807		$	825,056

 

 

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Other intangible assets totaled $121.2 million and $131.7 million, net of accumulated amortization of $84.8 million and $73.4 million, as of June 30, 2004 and December 31, 2003, respectively, and are comprised of the following (dollars in thousands):

 

		As of June 30, 2004						As of December 31, 2003
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Unamortizable intangible assets
Trademarks		$	63,700					$	63,700
Trade name		19,826						19,826
		$	83,526					$	83,526
Amortizable intangible assets
Backlog		$	72,503		$	(66,825	)	$	72,503		$	(59,108	)
Management contracts		25,690			(11,434		)	25,649			(9,708		)
Loan servicing rights		18,470			(4,748		)	17,694			(3,812		)
Other		5,808			(1,752		)	5,808			(821		)
		$	122,471		$	(84,759	)	$	121,654		$	(73,449	)
Total intangible assets		$	205,997		$	(84,759	)	$	205,180		$	(73,449	)

 

In accordance with SFAS No. 141, “Business Combinations,” trademarks of $63.7 million were separately identified as a result of the 2001 Merger. As a result of the Insignia Acquisition, a $19.8 million trade name was separately identified, which represents the Richard Ellis trade name in the U.K. that was owned by Insignia prior to the Insignia Acquisition. Both the trademarks 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 (U.S.), the U.K., France and other European operations, as well as valuation services and fund management contracts in the U.K. 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 our mortgage banking line of business in the U.S., the majority of which were acquired as part of the 2001 Merger. The loan servicing rights are being amortized over estimated useful lives of up to ten years.

 

Other amortizable intangible assets represent other intangible assets acquired as a result of the Insignia Acquisition including an intangible asset recognized for other non-contractual revenue acquired in the U.S. 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 20 years.

 

Amortization expense related to intangible assets was $2.7 million and $0.9 million for the three months ended June 30, 2004 and 2003, respectively, and $11.3 million and $1.9 million for the six months ended June 30, 2004 and 2003, respectively. The estimated annual amortization expense for each of the years ended December 31, 2004 through December 31, 2008 approximates $20.6 million, $6.6 million, $5.2 million, $4.4 million and $3.7 million, respectively.

 

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9.              Investments in and Advances to Unconsolidated Subsidiaries

 

Investments in and advances to unconsolidated subsidiaries are accounted for under the equity method of accounting. Combined condensed financial information for these entities is as follows (dollars in thousands):

 

Condensed Balance Sheets Information:

 

		June 30, 2004			December 31, 2003
Current assets		$	247,212		$	208,743
Non current assets		$	2,552,388		$	2,040,138
Current liabilities		$	173,614		$	154,778
Non current liabilities		$	1,218,973		$	969,993
Minority interest		$	5,838		$	4,600

 

Condensed Statements of Operations Information:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Net revenue		$	115,755		$	103,782		$	236,334		$	202,813
Operating income		$	31,647		$	32,146		$	55,535		$	55,750
Net income		$	39,915		$	26,711		$	74,099		$	47,787

 

Our investment management business involves investing our own capital in certain real estate investments with clients. We have provided investment management, property management, brokerage and other professional services to these equity investees.

 

10.       Debt

 

Since 2001, we have maintained a credit agreement with Credit Suisse First Boston (CSFB) and other lenders to fund strategic acquisitions and to provide for our working capital needs.  On April 23, 2004, we entered into an amendment to our previously amended and restated credit agreement that included a waiver generally permitting us to prepay, redeem, repurchase or otherwise retire up to $30.0 million of our existing indebtedness and provided for the refinancing of all outstanding amounts under our previous credit agreement as well as the amendment and restatement of our credit agreement upon the completion of our initial public offering.  On June 15, 2004, in connection with the completion of our IPO, we completed a refinancing of all amounts outstanding under our amended and restated credit agreement and entered into a new amended and restated credit agreement (the Credit Agreement), which became effective in connection with such refinancing.

 

Our Credit Agreement permits us, among other things, to use the net proceeds received from our IPO to pay down debt, including the redemption of all $38.3 million in aggregate principal amount of our 16% senior notes due 2011 and $70.0 million in aggregate principal amount of our 9¾% senior notes due 2010, and the prepayment of $15.0 million in principal amount of our term loan under our Credit Agreement, which prepayment occurred on June 15, 2004 (See Note 19 for additional information on the use of the net proceeds from our IPO).

 

Our Credit Agreement includes the following:  (1) a term loan facility of $295.0 million, requiring quarterly principal payments of $2.95 million through December 31, 2009 with the balance payable on March 31, 2010; and (2) a $150.0 million revolving credit facility, including revolving credit loans, letters of credit and a swingline loan facility, all maturing on March 31, 2009.  Our Credit Agreement also permits us to increase the term facility by up to $25.0 million, subject to the satisfaction of customary conditions.

 

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Borrowings under the term loan facility bear interest at varying rates based, at our option, on either LIBOR plus 2.25% to 2.50% or the alternate base rate plus 1.25% to 1.50%, in both cases as determined by reference to the credit rating assigned to the term facility by Moody’s Investors Service and Standard & Poor’s.  The potential increase of up to $25.0 million for the term loan facility would bear interest either at the same rate as described in the immediately preceding sentence or, in some circumstances as described in the Credit Agreement, at a higher or lower rate.  The total amount outstanding under the term loan facility included in senior secured term loan and current maturities of long-term debt in the accompanying consolidated balance sheets was $280.0 million and $297.5 million as of June 30, 2004 and December 31, 2003, respectively.

 

Borrowings under the revolving credit facility bear interest at varying rates based at our option, on either the applicable LIBOR plus 2.00% to 2.50% or the alternate base rate plus 1.00% to 1.50%, in both cases as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the 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.  We repaid our revolving credit facility as of June 30, 2004 and at December 31, 2003 we had no revolving credit principal outstanding.

 

Borrowings under the prior credit agreements and our current Credit Agreement have been, and continue to be, jointly and severally guaranteed by us and substantially all of our domestic subsidiaries and are secured by a pledge of substantially all of our assets. Additionally, the prior credit agreements required, and our current Credit Agreement continues to require, us to pay a fee based on the total amount of the unused revolving credit facility commitment.

 

In May 2003, in connection with the Insignia Acquisition, CBRE Escrow, Inc. (CBRE Escrow), a wholly owned subsidiary of CBRE, issued $200.0 million in aggregate principal amount of 9¾% senior notes, which are due May 15, 2010. CBRE Escrow merged with and into CBRE, and CBRE assumed all obligations with respect to the 9¾% senior notes in connection with the Insignia Acquisition.  The 9¾% senior notes are unsecured obligations of CBRE, senior to all of its current and future unsecured indebtedness, but subordinated to all of CBRE’s current and future secured indebtedness. The 9¾% senior notes are jointly and severally guaranteed on a senior basis by us and substantially all of our domestic subsidiaries. Interest accrues at a rate of 9¾% per year and is payable semi-annually in arrears on May 15 and November 15. The 9¾% senior notes are redeemable at our 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, we are permitted to redeem up to 35.0% of the originally issued amount of the 9¾% senior notes at 109¾% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings. In the event of a change of control (as defined in the indenture governing our 9¾% senior notes), we are obligated to make an offer to purchase the 9¾% senior notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest. The amount of the 9¾% senior notes included in the accompanying consolidated balance sheets was $200.0 million as of June 30, 2004 and December 31, 2003.

 

In June 2001, in connection with the 2001 Merger, Blum CB issued $229.0 million in aggregate principal amount of 11¼% senior subordinated notes due June 15, 2011 for approximately $225.6 million, net of discount. CBRE assumed all obligations with respect to the 11¼% senior subordinated notes in connection with the 2001 Merger.  The 11¼% senior subordinated notes are unsecured senior subordinated obligations of CBRE and rank equally in right of payment with any of CBRE’s existing and future senior subordinated unsecured indebtedness but are subordinated to any of CBRE’s existing and future senior indebtedness.  The 11¼% senior subordinated notes are jointly and severally guaranteed on a senior subordinated basis by us and substantially all of our domestic subsidiaries. The 11¼% senior subordinated notes require semi-annual payments of interest in arrears on June 15 and December 15 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, which we did not do. In addition, before June 15, 2004, we were permitted to redeem up to 35.0% of the originally issued amount of the notes at 111¼% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings. In the event of a change of control (as defined in the indenture governing our 11¼% senior subordinated notes), we are 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. In May and June 2004, we repurchased $21.6 million in aggregate principal amount of our 11¼% senior subordinated notes in the open market. We paid an aggregate of $3.1 million of premiums in connection with these

 

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purchases. The amount of the 11¼% senior subordinated notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $204.9 million and $226.2 million as of June 30, 2004 and December 31, 2003, respectively.

 

Also in connection with the 2001 Merger, we issued $65.0 million in aggregate principal amount of 16% senior notes due July 20, 2011. The 16% senior notes are unsecured obligations, senior to all of our current and future unsecured indebtedness but subordinated to all of our current and future secured indebtedness. 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 our ability to pay cash dividends is restricted by the terms of our Credit Agreement. Additionally, interest in excess of 12.0% may, at our option, be paid in kind through July 2006. In the event of a change in control (as defined in the indenture governing our 16% senior notes), we are obligated to make an offer to purchase all of our outstanding 16% senior notes at 101.0% of par. In addition, under the terms of the indenture governing the 16% senior notes and subject to the restrictions set forth in the Credit Agreement, the notes are redeemable at our option, in whole or in part, at 116.0% of par commencing on July 20, 2001 and at declining prices thereafter. The amount of the 16% senior notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $35.8 million and $35.5 million as of June 30, 2004 and December 31, 2003, respectively.

 

Our Credit Agreement and the indentures governing our 16% senior notes, our 9¾% senior notes and our 11¼% senior subordinated notes each contain numerous restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or make 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. Our Credit Agreement also currently requires us to maintain a minimum coverage ratio of interest and certain fixed charges and a maximum leverage and senior secured leverage ratio of EBITDA (as defined in the Credit Agreement) to funded debt.

 

Since 2001, a joint venture that we consolidate has incurred non-recourse debt to acquire a real estate investment in Japan. The debt is secured by a mortgage on the acquired real estate asset.  During the second quarter of 2004, the joint venture elected to extend the short-term maturities of this debt to the existing long-term maturity date of July 31, 2008, as allowed under the provisions of the debt agreement.  In our accompanying consolidated balance sheets, this debt comprised $2.0 million of our other short-term borrowings at December 31, 2003, and comprised $42.6 million and $41.8 million of our other long-term debt as of June 30, 2004 and December 31, 2003, respectively.

 

We had short-term borrowings of $248.6 million and $270.1 million as of June 30, 2004 and December 31, 2003, respectively, both with a weighted average interest rate of 2.7%.

 

Our wholly owned subsidiary, L.J. Melody & Company (L.J. Melody), has a credit agreement with Residential Funding Corporation (RFC) for the purpose of funding mortgage loans that will be resold. On September 26, 2003, we 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. By amendment on November 14, 2003, the agreement was modified to provide a revolving line of credit increase of $50.0 million that resulted in a total line of credit equaling $250.0 million, which expires on August 31, 2004.  On May 12, 2004, L.J. Melody further modified its credit agreement with RFC to provide a temporary revolving line of credit increase of $100.0 million that resulted in a total line of credit under the agreement equaling $350.0 million. This increase became effective on May 30, 2004 and expires 90 days after the effective date.

 

During the quarter ended June 30, 2004, we had a maximum of $219.9 million revolving line of credit principal outstanding with RFC. At June 30, 2004 and December 31, 2003 we had a $219.9 million and a $230.8 million warehouse line of credit outstanding, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets. Additionally, we had a $219.9 million and a $230.8 million of mortgage loans held for sale (warehouse receivable), which represented mortgage loans funded through the line of credit that, while committed to be purchased, had not yet been purchased as of June 30, 2004 and December 31, 2003, respectively, which are also included in the accompanying consolidated balance sheets.

 

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In connection with our acquisition of Westmark Realty Advisors in 1995, we issued approximately $20.0 million in aggregate principal amount of senior notes. The Westmark senior notes are secured by letters of credit equal to approximately 50% of the outstanding balance at December 31, 2003. The Westmark senior notes are redeemable at the discretion of the note holders and have final maturity dates of June 30, 2008 and June 30, 2010. During the year ended December 31, 2002, all of the Westmark senior notes bore interest at 9.0%. On January 1, 2003, the interest rate on some of these notes was converted to varying rates equal to the interest rate in effect with respect to amounts outstanding under our Credit Agreement. On January 1, 2005, the interest rate on all of the other Westmark senior notes will be adjusted to equal the interest rate then in effect with respect to amounts outstanding under our Credit Agreement. The amount of the Westmark senior notes included in short-term borrowings in the accompanying consolidated balance sheets was $12.1 million as of June 30, 2004 and December 31, 2003.

 

Insignia, which we acquired in July 2003, issued loan notes as partial consideration for previous acquisitions of businesses in the U.K. The acquisition loan notes are payable to the sellers of the previously acquired U.K. 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. As of June 30, 2004 and December 31, 2003, $10.1 million and $12.2 million of the acquisition loan notes were outstanding, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets.

 

A significant number of our subsidiaries in Europe have had a Euro cash pool loan since 2001, which is used to fund their short-term liquidity needs. The Euro cash pool loan is an overdraft line for our European operations issued by HSBC Bank. The Euro cash pool loan has no stated maturity date and bears interest at varying rates based on a base rate as defined by the bank plus 2.5%. The amount of the Euro cash pool loan included in short-term borrowings in the accompanying consolidated balance sheets was $5.4 million and $11.5 million at June 30, 2004 and December 31, 2003, respectively.

 

11.       Commitments and Contingencies

 

We are a party to a number of pending or threatened lawsuits arising out of, or incident to, our ordinary course of business. Our management believes that any liability imposed upon us that may result from disposition of these lawsuits will not have a material effect on our consolidated financial position or results of operations.

 

In connection with the sale of real estate investment assets by Insignia to Island Fund I LLC (Island) on July 23, 2003, Insignia agreed to maintain letter of credit support for real estate investment assets that were subject to the purchase agreement until the earlier of (1) the third anniversary of the completion of the sale, (2) the date on which the letter of credit is no longer required pursuant to the applicable real estate investment asset agreement or (3) the completion of a sale of the relevant underlying real estate investment asset. As of June 30, 2004, an aggregate of approximately $9.2 million of this letter of credit support remained outstanding under the purchase agreement. Also in connection with the sale, Insignia agreed to maintain a $1.3 million guarantee of a repayment obligation with respect to one of the real estate investment assets. Island agreed to reimburse us for 50% of any draws against these letters of credit or the repayment guarantee while they are outstanding and delivered a letter of credit to us in the amount of approximately $2.9 million as security for Island’s reimbursement obligation. As a result of this reimbursement obligation, we effectively retain potential liability for 50% of any future draws against these letters of credit and the repayment guarantee. However, there can be no assurance that Island will be able to reimburse us in the event of any draws against the letters of credit or the repayment guarantee or that Island’s future reimbursement obligations will not exceed the amount of the letter of credit provided to us by Island.

 

L.J. Melody previously executed an agreement with the Federal National Mortgage Association (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 and we retained the credit risk on the first 2% of losses incurred on the underlying portfolio of commercial mortgage loans. The current loan portfolio balance is $91.2 million and we have collateralized a portion of our 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.

 

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We had outstanding letters of credit totaling $23.2 million as of June 30, 2004, excluding letters of credit related to our subsidiaries’ outstanding indebtedness. Approximately $13.0 million of these letters of credit secure certain office leases and are outstanding pursuant to the revolving credit facility under our Credit Agreement and a reimbursement agreement with the Bank of Nova Scotia.  An additional $9.2 million of these letters of credit were issued pursuant to the terms of the purchase agreement with Island described above and are outstanding pursuant to the reimbursement agreement with the Bank of Nova Scotia. Under the agreement with the Bank of Nova Scotia, we may issue up to a maximum of approximately $11.0 million of letters of credit at any one time and these outstanding letters of credit are secured by the same assets of ours that secure our Credit Agreement. The remaining outstanding letter of credit is the Fannie Mae letter of credit described above, which was issued pursuant to a credit agreement with Wells Fargo Bank. Under this agreement, we may issue up to a maximum of  $8.0 million of letters of credit, and these outstanding letters of credit are secured by the same assets of ours that secure our Credit Agreement. The outstanding letters of credit as of June 30, 2004 expire at varying dates through March 31, 2005. However, we are obligated to renew the letters of credit related to certain office leases until as late as 2023, the letters of credit related to the Island purchase agreement until as late as July 23, 2006 and the Fannie Mae letter of credit until our obligation to cover potential credit losses is satisfied.

 

We had guarantees totaling $11.5 million as of June 30, 2004, which consisted primarily of guarantees of property debt as well as the obligations to Island and Fannie Mae discussed above. Approximately $4.8 million of the guarantees are related to investment activity that is scheduled to expire in October 2008. Approximately $3.4 million of guarantees are related to office leases in Europe and Asia. These guarantees will expire at the end of the lease terms. The guarantee obligation related to the agreement with Fannie Mae discussed above will expire in December 2004. The guarantee related to the Island purchase agreement will expire on the August 30, 2004 maturity date of the underlying loan agreement, unless such loan is renewed, modified or extended prior to such date to provide for a later maturity date. Renewals, modifications and extensions of such loan may be made without our consent, but the Insignia $1.3 million amount of our guarantee related to such loan may not be increased without our consent in connection with any such renewal, modification or extension.

 

An important part of the strategy for our investment management business involves investing our capital in certain real estate investments with our clients. As of June 30, 2004 we had committed $17.1 million to fund future co-investments. In addition to required future capital contributions, some of the co-investment entities may request additional capital from us and our subsidiaries holding investments in those assets and the failure to provide these contributions could have adverse consequences to our interests in these investments.

 

12.       Comprehensive Income (Loss)

 

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). In the accompanying consolidated balance sheets, accumulated other comprehensive loss consists of foreign currency translation adjustments and minimum pension liability adjustments. Foreign currency translation adjustments exclude any income tax effect given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time.

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Net income (loss)		$	2,965		$	5,172		$	(13,603	)	$	3,825
Foreign currency translation gain (loss)		1,686			(3,395		)	(2,801		)	(3,274		)
Comprehensive income (loss)		$	4,651		$	1,777		$	(16,404	)	$	551

 

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13.       Per Share Information

 

Basic income (loss) per share was computed by dividing the net income (loss) by the weighted average number of common shares outstanding of 63,990,494 and 41,683,699 for the three months ended June 30, 2004 and 2003, respectively, and 63,256,275 and 41,667,644 for the six months ended June 30, 2004 and 2003, respectively.

 

Diluted income per share for the three months ended June 30, 2004 included the dilutive effect of potential common shares of 5,385,435.  As a result of operating losses incurred for the six months ended June 30, 2004, dilutive weighted average shares outstanding did not give effect to potential common shares, as to do so would have been anti-dilutive. Dilutive income per share for the three and six months ended June 30, 2003 included the dilutive effect of potential common shares of 840,194 and 795,157, respectively.

 

14.       Fiduciary Funds

 

The accompanying consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which amounted to $714.8 million and $626.3 million at June 30, 2004 and December 31, 2003, respectively.

 

15.       Pensions

 

Net periodic pension cost consisted of the following (dollars in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Service cost		$	1,470		$	1,419		$	3,130		$	2,838
Interest cost		2,781			1,392			5,618			2,784
Expected return on plan assets		(3,123		)	(1,587		)	(6,307		)	(3,175		)
Amortization of prior service  costs		(53		)	—			(106		)	—
Amortization of unrecognized net gain		414			497			835			994
Net periodic pension cost		$	1,489		$	1,721		$	3,170		$	3,441

 

We contributed an additional $1.3 million and $2.3 million to fund our pension plan during the three and six months ended June 30, 2004.  We expect to contribute a total of $4.5 million to fund our pension plan for the year ended December 31, 2004.

 

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16.       Merger-Related Charges

 

We recorded merger-related charges of $11.6 million and $21.5 million for the three and six months ended June 30, 2004 in connection with the Insignia Acquisition. These charges primarily related to the exit of facilities that were occupied by us prior to the Insignia Acquisition as well as the termination of employees, both of which became duplicative as a result of the Insignia Acquisition. We recorded charges for the exit of these facilities as premises were vacated and for redundant employees as these employees were severed, both in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Additionally, during the three and six months ended June 30, 2004, we recorded consulting costs, which represented fees paid to outside parties for nonrecurring services relating to the combination of Insignia’s financial systems and businesses with ours.  Our merger-related charges consisted of the following (dollars in thousands):

 

		2003 Charge			2004 Adjustments			Utilized To Date			To be Utilized
Lease termination costs		$	15,805		$	16,208		$	(3,522	)	$	28,491
Severance		7,042			2,061			(9,103		)	—
Change of control payments		6,525			—			(6,525		)	—
Consulting costs		2,738			1,527			(4,265		)	—
Other		4,707			1,738			(6,045		)	400
Total merger-related charges		$	36,817		$	21,534		$	(29,460	)	$	28,891

 

17.       Guarantor and Nonguarantor Financial Statements

 

The 9¾% senior notes are jointly and severally guaranteed on a senior basis by us and substantially all of our domestic subsidiaries. In addition, the 11¼% senior subordinated notes are jointly and severally guaranteed on a senior subordinated basis by us and substantially all of our domestic subsidiaries. (See Note 10 to the consolidated financial statements for additional information on the 9¾% senior notes and the 11¼% senior subordinated notes).

 

The following condensed consolidating financial information includes:

 

(1) Condensed consolidating balance sheets as of June 30, 2004 and December 31, 2003; condensed consolidating statements of operations for the three and six months ended June 30, 2004 and 2003; and condensed consolidating statements of cash flows for the six months ended June 30, 2004 and 2003, of (a) CB Richard Ellis Group as the parent, (b) CBRE as the subsidiary issuer, (c) the guarantor subsidiaries, (d) the nonguarantor subsidiaries and (e) CB Richard Ellis Group on a consolidated basis; and

 

(2) Elimination entries necessary to consolidate CB Richard Ellis Group 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. The preliminary purchase accounting adjustments associated with the Insignia Acquisition have been recorded in the accompanying consolidated financial statements. The condensed consolidated balance sheets as of June 30, 2004 and December 31, 2003, reflect the allocation of goodwill based upon the estimated fair value of Insignia’s acquired reporting units (See Note 3 to the consolidated financial statements for additional information).

 

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CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2004

(Dollars in thousands)

 

		Parent			CBRE			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Elimination			Consolidated Total
Current Assets:
Cash and cash equivalents		$	817		$	1,764		$	147,018		$	29,993		$	—		$	179,592
Restricted cash		—			—			10,096			1,948			—			12,044
Receivables, less allowance for doubtful accounts		21			17			126,560			168,658			—			295,256
Warehouse receivable (a)		—			—			219,935			—			—			219,935
Prepaid expenses other current assets		80,838			926			21,228			24,136			—			127,128
Total Current Assets		81,676			2,707			524,837			224,735			—			833,955
Property and equipment, net		—			—			77,457			45,927			—			123,384
Goodwill		—			—			573,101			251,955			—			825,056
Other intangible assets, net		—			—			95,224			26,014			—			121,238
Deferred compensation assets		—			79,094			—			—			—			79,094
Investments in and advances to unconsolidated subsidiaries		—			5,261			55,725			15,007			—			75,993
Investments in consolidated subsidiaries		279,288			207,403			137,742			—			(624,433		)	—
Inter-company loan receivable		107,603			788,493			—			—			(896,096		)	—
Deferred tax assets, net		35,442			—			—			—			—			35,442
Other assets, net		2,225			31,708			33,601			57,380			—			124,914
Total Assets		$	506,234		$	1,114,666		$	1,497,687		$	621,018		$	(1,520,529	)	$	2,219,076
Current Liabilities:
Accounts payable and accrued expenses		$	3,923		$	6,619		$	81,173		$	89,816		$	—		$	181,531
Inter-company payable		—			—			—			—			—			—
Compensation and employee benefits payable		—			—			95,733			50,927			—			146,660
Accrued bonus and profit sharing		—			—			58,081			68,422			—			126,503
Short-term borrowings:
Warehouse line of credit (a)		—			—			219,935			—			—			219,935
Other		—			—			23,069			5,549			—			28,618
Total short-term borrowings		—			—			243,004			5,549			—			248,553
Current maturities of long-term debt		—			11,800			1,028			201			—			13,029
Other current liabilities		13,314			—			—			—			—			13,314
Total Current Liabilities		17,237			18,419			479,019			214,915			—			729,590
Long-Term Debt:
11¼% senior subordinated notes, net of unamortized discount		—			204,913			—			—			—			204,913
Senior secured term loan		—			268,200			—			—			—			268,200
9¾% senior notes		—			200,000			—			—			—			200,000
16% senior notes, net of unamortized discount		35,800			—			—			—			—			35,800
Inter-company loan payable		—			—			750,695			145,401			(896,096		)	—
Other long-term debt		—			—			330			43,107			—			43,437
Total Long-Term Debt		35,800			673,113			751,025			188,508			(896,096		)	752,350
Deferred compensation liability		—			143,846			—			—			—			143,846
Other liabilities		—			—			60,240			71,690			—			131,930
Total Liabilities		53,037			835,378			1,290,284			475,113			(896,096		)	1,757,716
Minority interest		—			—			—			8,163			—			8,163
Commitments and contingencies
Stockholders’ Equity		453,197			279,288			207,403			137,742			(624,433		)	453,197
Total Liabilities and Stockholders’ Equity		$	506,234		$	1,114,666		$	1,497,687		$	621,018		$	(1,520,529	)	$	2,219,076

 

(a)  Although L.J. Melody is included amongst our domestic subsidiaries, which jointly and severally guarantee both our 9¾% senior notes and 11¼% senior subordinated notes, all warehouse receivables funded under the RFC line of credit are pledged to RFC, and accordingly are not included as collateral for our other outstanding debt.

 

20

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2003

(Dollars in thousands)

 

		Parent			CBRE			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Elimination			Consolidated Total
Current Assets:
Cash and cash equivalents		$	3,008		$	17		$	148,752		$	12,104		$	—		$	163,881
Restricted cash		—			—			12,545			2,354			—			14,899
Receivables, less allowance for doubtful accounts		27			18			114,215			208,156			—			322,416
Warehouse receivable (a)		—			—			230,790			—			—			230,790
Prepaid expenses other current assets		63,557			42,151			18,957			22,998			(40,667		)	106,996
Total Current Assets		66,592			42,186			525,259			245,612			(40,667		)	838,982
Property and equipment, net		—			—			66,280			47,289			—			113,569
Goodwill		—			—			572,376			247,182			—			819,558
Other intangible assets, net		—			—			101,326			30,405			—			131,731
Deferred compensation assets		—			76,389			—			—			—			76,389
Investments in and advances to unconsolidated  subsidiaries		—			4,973			50,732			12,656			—			68,361
Investments in consolidated subsidiaries		321,451			252,399			199,393			—			(773,243		)	—
Inter-company loan receivable		—			787,009			—			—			(787,009		)	—
Deferred tax assets, net		32,179			—			—			—			—			32,179
Other assets, net		2,555			27,819			44,779			57,559			—			132,712
Total Assets		$	422,777		$	1,190,775		$	1,560,145		$	640,703		$	(1,600,919	)	$	2,213,481
Current Liabilities:
Accounts payable and accrued expenses		$	1,187		$	7,614		$	64,392		$	116,594		$	—		$	189,787
Inter-company payable		40,667			—			—			—			(40,667		)	—
Compensation and employee benefits payable		—			—			98,160			50,714			—			148,874
Accrued bonus and profit sharing		—			—			112,365			87,978			—			200,343
Short-term borrowings:
Warehouse line of credit (a)		—			—			230,790			—			—			230,790
Other		—			—			25,480			13,867			—			39,347
Total short-term borrowings		—			—			256,270			13,867			—			270,137
Current maturities of long-term debt		—			10,000			1,029			256			—			11,285
Other current liabilities		12,522			—			—			469			—			12,991
Total Current Liabilities		54,376			17,614			532,216			269,878			(40,667		)	833,417
Long-Term Debt:
11¼% senior subordinated notes, net of  unamortized discount		—			226,173			—			—			—			226,173
Senior secured term loan		—			287,500			—			—			—			287,500
9¾% senior notes		—			200,000			—			—			—			200,000
16% senior notes, net of unamortized discount		35,472			—			—			—			—			35,472
Inter-company loan payable		—			—			726,844			60,165			(787,009		)	—
Other long-term debt		—			—			330			41,945			—			42,275
Total Long-Term Debt		35,472			713,673			727,174			102,110			(787,009		)	791,420
Deferred compensation liability		—			138,037			—			—			—			138,037
Other liabilities		—			—			48,356			62,666			—			111,022
Total Liabilities		89,848			869,324			1,307,746			434,654			(827,676		)	1,873,896
Minority interest		—			—			—			6,656			—			6,656
Commitments and contingencies
Stockholders’ Equity		332,929			321,451			252,399			199,393			(773,243		)	332,929
Total Liabilities and Stockholders’ Equity		$	422,777		$	1,190,775		$	1,560,145		$	640,703		$	(1,600,919	)	$	2,213,481

 

(a)  Although L.J. Melody is included amongst our domestic subsidiaries, which jointly and severally guarantee both our 9¾% senior notes and 11¼% senior subordinated notes, all warehouse receivables funded under the RFC line of credit are pledged to RFC, and accordingly are not included as collateral for our other outstanding debt.

 

21

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2004

(Dollars in thousands)

 

		Parent			CBRE			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Elimination			Consolidated Total
Revenue		$	—		$	—		$	378,174		$	172,742		$	—		$	550,916
Costs and expenses:
Cost of services		—			—			198,325			74,286			—			272,611
Operating, administrative and other		354			2,116			148,138			79,931			—			230,539
Depreciation and amortization		—			—			7,324			3,506			—			10,830
Merger-related charges		—			—			10,605			969			—			11,574
Operating (loss) income		(354		)	(2,116		)	13,782			14,050			—			25,362
Equity income (loss) from unconsolidated subsidiaries		—			82			2,815			(129		)	—			2,768
Interest income		34			12,878			560			1,338			(12,860		)	1,950
Interest expense		1,645			19,781			11,532			3,077			(12,860		)	23,175
Equity income from consolidated subsidiaries		3,599			9,304			5,509			—			(18,412		)	—
Income before (benefit) provision for income taxes		1,634			367			11,134			12,182			(18,412		)	6,905
(Benefit) provision for income taxes		(1,331		)	(3,232		)	1,830			6,673			—			3,940
Net income		$	2,965		$	3,599		$	9,304		$	5,509		$	(18,412	)	$	2,965

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2003

(Dollars in thousands)

 

Parent

CBRE

Guarantor Subsidiaries

Nonguarantor Subsidiaries

Elimination

Consolidated Total

Revenue

$

—

$