As filed with the Securities and Exchange Commission on October 20, 2003
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CB Richard Ellis Services, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 6500 | 52-1616016 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
865 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
(213) 613-3226
(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices)
Kenneth J. Kay
Chief Financial Officer
CB Richard Ellis Services, Inc.
865 South Figueroa Street, Suite 3400
Los Angeles, CA 90017
(213) 613-3226
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With a copy to:
William B. Brentani
Simpson Thacher & Bartlett LLP
3330 Hillview Avenue
Palo Alto, CA 94304
(650) 251-5000
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ¨
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered |
Amount to be |
Maximum offering price per unit |
Maximum aggregate offering price |
Amount of registration fee | ||||
9 3/4% Senior Notes Due May 15, 2010 |
$200,000,000 | 100% | $200,000,000 | $16,180 | ||||
Guarantees of 9 3/4% Senior Notes Due May 15, 2010 (1) |
$200,000,000 | 100% | $200,000,000 | (2) |
(1) | See inside facing page for additional registrant guarantors. |
(2) | Pursuant to Rule 457(n) under the Securities Act of 1933, as amended, no separate fee for the guarantees is payable. |
The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
TABLE OF ADDITIONAL REGISTRANT GUARANTORS
Exact name of Registrant guarantor as specified in its charter |
State or other |
I.R.S. |
Primary |
Address including zip code and telephone number including area code of Registrant guarantors | ||||
Baker Commercial Realty, Inc. |
Texas | 75-2443696 | 6512 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Bonutto-Hofer Investments |
California | 33-0003584 | 6799 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
CB Richard Ellis Corporate Facilities Management, Inc. |
Delaware | 33-0582062 | 6500 | 970 W. 190th Street, Suite 560 | ||||
Torrance, CA 90502 (310) 380-5887 | ||||||||
CB Richard Ellis, Inc. |
Delaware | 95-2743174 | 6500 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
CB Richard Ellis Investors, Inc. |
California | 95-3242122 | 6799 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
CB Richard Ellis Investors, L.L.C. |
Delaware | 95-3695034 | 6799 | 865 South Figueroa Street, Suite 3500 Los Angeles, CA 90017 (213) 683-4318 | ||||
CB Richard Ellis of California, Inc. |
Delaware | 33-0659572 | 6531 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
CB Richard Ellis Real Estate Services, Inc. (formerly known as Insignia/ESG, Inc.) |
Delaware | 57-0966617 | 6512 | 970 W. 190th Street, Suite 560 | ||||
Torrance, CA 90502 (310) 380-5887 | ||||||||
CBRE Consulting, Inc. |
California | 68-0149728 | 6531 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
CBRE Holding, Inc. |
Delaware | 94-3391143 | 6500 | 865 South Figueroa Street, Suite 3400 Los Angeles, CA 90017 (213) 613-3226 | ||||
CBRE HR, Inc. |
California | 33-0687470 | 6531 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
CBRE/LJM Mortgage Company, L.L.C. |
Delaware | 74-2900986 | 6162 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
CBRE/LJM-Nevada, Inc. |
Nevada | 76-0592505 | 6162 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
CBREI Funding, L.L.C. |
Delaware | 95-4889727 | 6531 | 865 South Figueroa Street, Suite 3500 Los Angeles, CA 90017 (213) 683-4318 | ||||
CBREI Manager, L.L.C. |
Delaware | 75-3091166 | 6531 | 865 South Figueroa Street, Suite 3500 Los Angeles, CA 90017 (213) 683-4318 | ||||
CBRE-Profi Acquisition Corp. |
Delaware | 33-6764889 | 6531 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Edward S. Gordon Management Corporation |
New York | 13-2792438 | 6212 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Global Innovation Advisor, LLC |
Delaware | 95-4869925 | 6799 | 865 South Figueroa Street, Suite 3500 Los Angeles, CA 90017 (213) 683-4318 | ||||
Holdpar A |
Delaware | 95-4536362 | 6799 | 865 South Figueroa Street, Suite 3500 Los Angeles, CA 90017 (213) 683-4318 | ||||
Holdpar B |
Delaware | 95-4536363 | 6799 | 865 South Figueroa Street, Suite 3500 Los Angeles, CA 90017 (213) 683-4318 | ||||
I/ESG Octane Holdings, LLC |
Delaware | 57-1121106 | 6500 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
IIII-BSI Holdings, LLC |
Delaware | 57-1111064 | 6799 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
IIII-SSI Holdings, LLC |
Delaware | 57-1112916 | 6799 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Insignia/ESG Capital Corporation |
Delaware | 51-0390846 | 6799 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Insignia/ESG Northeast |
Delaware | 57-1116411 | 6512 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Insignia Financial Group, Inc. |
Delaware | 56-2084290 | 6552 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Insignia ML Properties, LLC |
Delaware | 57-1134322 | 6512 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Koll Capital Markets Group, Inc. |
Delaware | 33-0556837 | 6500 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Koll Investment Management, Inc. |
California | 33-0367147 | 6799 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Koll Partnerships I, Inc. |
Delaware | 33-0607113 | 6500 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
Koll Partnerships II, Inc. |
Delaware | 33-0622656 | 6500 | 970 W. 190th Street, Suite 560 Torrance, CA 90502 (310) 380-5887 | ||||
L.J. Melody & Company |
Texas | 74-1949382 | 6162 | 5847 San Felipe, Suite 4400 Houston, TX 77057 (713) 787-1900 | ||||
L.J. Melody & Company of Texas, L.P. |
Texas | 76-0590855 | 6162 | 5847 San Felipe, Suite 4400 Houston, TX 77057 (713) 787-1900 | ||||
LJMGP, LLC |
Delaware | 76-0686627 | 6531 | 5847 San Felipe. Suite 4400 Houston, TX 77057 (713) 787-1946 | ||||
Vincent F. Martin, Jr., Inc. |
California | 95-3695032 | 6799 | 865 South Figueroa Street, Suite 3500 Los Angeles, CA 90017 (213) 683-4318 | ||||
Westmark Real Estate Acquisition Partnership, L.P. |
Delaware | 95-4535866 | 6799 | 865 South Figueroa Street, Suite 3500 | ||||
Los Angeles, CA 90017 (213) 683-4318 |
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to completion, dated October 20, 2003
PROSPECTUS
$200,000,000
CB Richard Ellis Services, Inc.
Offer to Exchange All Outstanding 9 3/4% Senior Notes Due May 15, 2010 for 9¾% Senior Notes Due May 15, 2010, which have been registered under the Securities Act of 1933
Unconditionally Guaranteed on a Senior Basis by CBRE Holding, Inc. and Some of our Subsidiaries
The Exchange Offer | The Exchange Notes | |
We will exchange all outstanding notes that are validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are freely tradeable, except in limited circumstances described below.
You may withdraw tenders of outstanding notes at any time prior to the expiration of the exchange offer.
The exchange offer expires at 5:00 p.m., New York City time, on , 2003, unless extended. We do not currently intend to extend the expiration date.
The exchange of outstanding notes for exchange notes in the exchange offer will not be a taxable event for U.S. federal income tax purposes.
We will not receive any proceeds from the exchange offer. |
The exchange notes are being offered in order to satisfy certain of our obligations under the registration rights agreements entered into in connection with the placement of the outstanding notes.
The terms of the exchange notes to be issued in the exchange offer are substantially identical to the outstanding notes, except that the exchange notes will be freely tradeable, except in limited circumstances described below.
Resales of Exchange Notes
The exchange notes may be sold in the over-the-counter market, in negotiated transactions or through a combination of such methods. |
If you are a broker-dealer and you receive exchange notes for your own account, you must acknowledge that you will deliver a prospectus in connection with any resale of the exchange notes. By making such acknowledgement, you will not be deemed to admit that you are an underwriter under the Securities Act of 1933. Broker-dealers may use this prospectus in connection with any resale of exchange notes received in exchange for outstanding notes where the outstanding notes were acquired by the broker-dealer as a result of market-making activities or trading activities. We will make this prospectus available to any broker-dealer for use in any such resale for a period of up to 180 days after the date of the prospectus. A broker-dealer may not participate in the exchange offer with respect to outstanding notes acquired other than as a result of market-making activities or trading activities. See Plan of Distribution.
If you are an affiliate of CB Richard Ellis Services, Inc. or are engaged in, or intend to engage in, or have an agreement or understanding to participate in, a distribution of the exchange notes, you cannot rely on the applicable interpretations of the Securities and Exchange Commission and you must comply with the registration requirements of the Securities Act of 1933 in connection with any resale transaction.
You should consider carefully the risk factors beginning on page 15 of this prospectus before participating in the exchange offer.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2003.
Page | ||
1 | ||
15 | ||
28 | ||
29 | ||
30 | ||
31 | ||
Unaudited Pro Forma Financial Information |
33 | |
46 | ||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
48 | |
70 | ||
76 | ||
84 | ||
89 | ||
93 | ||
136 | ||
146 | ||
150 | ||
154 | ||
155 | ||
155 | ||
155 | ||
156 | ||
Index to Consolidated Financial Statements and Financial Statement Schedule |
F-1 |
CB Richard Ellis Services, Inc. and the corporate logo of CB Richard Ellis Services set forth on the cover of this prospectus are the registered trademarks of CB Richard Ellis Services in the United States. All other trademarks or service marks are trademarks or service marks of the companies that use them.
This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any exchange notes offered hereby in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. The information contained in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies. No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this prospectus in connection with the offer contained herein and, if given or made, such information or representations must not be relied upon as having been authorized by us. Neither the delivery of this prospectus nor any sale made hereunder shall under any circumstances create an implication that there has been no change in our affairs or that of our subsidiaries since the date hereof.
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This summary may not contain all of the information that may be important to you. You should read this summary together with the entire prospectus, including the more detailed information in the financial statements and the accompanying notes appearing elsewhere in this prospectus. Unless the context indicates otherwise, (1) the terms we, our and us refer to CB Richard Ellis Services, Inc. and its subsidiaries, (2) the term Insignia refers to Insignia Financial Group, Inc. and its subsidiaries and (3) the term CBRE Holding refers to our parent company, CBRE Holding, Inc.
Our Company
We are one of the worlds largest commercial real estate services firms in terms of revenue, offering a full range of services to commercial real estate occupiers, owners, lenders and investors. On July 23, 2003, we completed our acquisition of Insignia, another leading U.S. and international provider of commercial real estate services. Through our acquisition of Insignia, we expect to solidify our position as a market leader in the commercial real estate services industry. In 2002, on a pro forma basis, we and Insignia provided commercial real estate services through a combined total of 250 offices in 47 countries. We provide our services under the CB Richard Ellis brand name on a local, national and international basis. During 2002, on a pro forma basis giving effect to the Insignia acquisition and related transactions, we and Insignia advised on approximately 29,050 commercial lease transactions involving aggregate rents of approximately $33.0 billion and approximately 6,160 commercial sales transactions with an aggregate value of approximately $49.0 billion. Also during 2002, on a pro forma basis giving effect to the Insignia acquisition and related transactions, we and Insignia managed approximately 668.5 million square feet of property, provided investment management services for approximately $12.9 billion in assets, originated approximately $9.0 billion in loans, serviced approximately $58.9 billion in loans through a joint venture, engaged in approximately 40,800 valuation, appraisal and advisory assignments and serviced over 1,400 clients with proprietary research.
We report our commercial real estate operations through three geographically-organized segments: (1) Americas, (2) Europe, the Middle East and Africa, or EMEA, and (3) Asia Pacific. The Americas consists of operations in the United States, Canada, Mexico and South America. EMEA mainly consists of operations in Europe, and Asia Pacific consists of operations in Asia, Australia and New Zealand. We have worldwide capabilities to assist buyers in the purchase and sellers in the disposition of commercial property, to assist tenants in finding available space and owners in finding qualified tenants, to provide valuations and appraisals for real estate property, to assist in the arrangement of financing for commercial real estate, to provide commercial loan servicing, to provide research and consulting services, to help institutional investors manage commercial real estate portfolios, to provide property and facilities management services and to serve as the outsource service provider to corporations seeking to be relieved of the responsibility for managing their real estate operations.
Business Overview
Americas
The Americas is our largest business segment in terms of revenue, earnings and cash flow. It includes the following major lines of businesses:
| Our brokerage services line of business provides sales, leasing and consulting services relating to commercial real estate. |
| Our investment properties line of business provides similar brokerage services primarily for commercial, multi-housing and hotel real estate property marketed for sale to institutional and private investors. |
| Our corporate services line of business focuses on building relationships with large corporate clients, with the objective of establishing long-term relationships with clients that could benefit from utilizing corporate services and/or global presence. |
| Our commercial mortgage line of business provides commercial loan origination and loan servicing through our wholly owned subsidiary, L.J. Melody & Company. |
| Our valuation line of business provides valuation, appraisal and market research services. |
| Our investment management line of business provides investment management services through our wholly owned subsidiary, CBRE Investors, L.L.C. |
| Our asset services line of business provides value-added asset and related services for income-producing properties owned by local, regional and institutional investors. |
| Our facilities management line of business specializes in the administration, management, maintenance and project management of properties that are occupied by large corporations and institutions. |
EMEA
Our EMEA division has offices in 27 countries, with its largest operations located in the United Kingdom, France, Spain, the Netherlands and Germany. Operations within the various countries typically provide, at a minimum, the following services: brokerage, investment properties, corporate services, valuation/appraisal services, asset services and facilities management. Our operations in some countries also provide financial and investment management services. These services are provided to a wide range of clients and cover office, retail, leisure, industrial, logistics, biotechnology, telecommunications and residential property assets.
We are one of the leading real estate services companies in the United Kingdom. We provide a broad range of commercial property real estate services to investment, commercial and corporate clients located in London. We also have four regional offices in Birmingham, Manchester, Edinburgh and Glasgow. In France, we are a key market leader in Paris and provide a complete range of services to the commercial property sector, as well as some services to the residential property market. In Spain, we provide extensive coverage operating through our offices in Madrid, Barcelona, Valencia, Malaga, Marbella and Palma de Mallorca. Our Netherlands business is based in Amsterdam, while our German operations are located in Frankfurt, Munich, Berlin and Hamburg. Our operations in these countries generally provide a full range of services to the commercial property sector, along with some residential property services.
Asia Pacific
Our Asia Pacific division has offices in 11 countries. We believe we are one of only a few companies that can provide a full range of real estate services to large corporations throughout the region, including brokerage, investment management (in Japan only), corporate services, valuation/appraisal services, asset services and facilities management. We believe that the CB Richard Ellis brand name is recognized throughout this region as one of the leading worldwide commercial real estate services firms. In Asia, our principal operations are located in China (including Hong Kong), Singapore, South Korea and Japan. The Pacific region includes Australia and New Zealand, with principal offices located in Brisbane, Melbourne, Perth, Sydney, Auckland and Wellington.
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Competitive Strengths
The market for our commercial real estate business is both highly fragmented and competitive. Thousands of local commercial real estate brokerage firms and hundreds of regional commercial real estate brokerage firms have offices throughout the world. Most of our competitors in the brokerage and asset services lines of business are local or regional firms that are substantially smaller than we are on an overall basis, but in some cases may be larger locally. In addition, there are several national and, in some cases, international real estate brokerage firms with whom we compete. We believe we have a variety of competitive advantages that have helped to establish our strong, global leadership position within the commercial real estate services industry. These advantages include the following:
| global brand name and presence; |
| market leader and full service provider; |
| strong relationships with established customers; |
| recurring revenue stream; |
| attractive business model, including |
| diversified revenue base, |
| variable cost structure, and |
| low capital requirements; |
| empowered resources; and |
| experienced senior management with significant equity stake. |
Our Strategy
Our goal is to be the worlds leading commercial real estate services firm offering unparalleled breadth and quality of services across the globe. To achieve this goal, we intend to:
| increase market share by capitalizing on breadth of services, global presence and continued cross-selling; |
| capitalize on increased corporate outsourcing to increase market share; |
| grow our investment management business; and |
| continue to focus on efficiency improvements and the reduction of costs. |
Summary of the Insignia Acquisition and Related Transactions
On July 23, 2003, we completed our acquisition of Insignia. We believe that the Insignia acquisition significantly increases our scale, business line and regional diversity, as well as strengthens our leadership position in the commercial real estate services industry worldwide. In addition, we believe that the Insignia acquisition provides significant cost-saving opportunities for us. See Risk FactorsRisks Relating to Our BusinessWe cannot assure you as to when or if we will be able to achieve all of our expected cost savings in connection with the Insignia acquisition.
To partially finance the acquisition, certain of CBRE Holdings existing stockholders, including affiliates of Blum Capital Partners, L.P., made an aggregate cash contribution of $120.0 million to CBRE Holding at the
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closing of the Insignia acquisition, in consideration for which CBRE Holding issued to these stockholders an aggregate of 7,500,000 shares of its common stock. For a more detailed description of the equity financing received by CBRE Holding in connection with the Insignia acquisition, see The Insignia Acquisition and Related TransactionsEquity Financing.
For additional information regarding the Insignia acquisition and the related transactions, please read the description included under the caption The Insignia Acquisition and Related Transactions. For additional information regarding the financing of the Insignia acquisition, please see the description included under the caption Use of Proceeds.
Recent Developments
On October 14, 2003, we refinanced all of the outstanding loans under the amended and restated credit agreement we entered into in connection with the completion of the Insignia acquisition. As part of this refinancing, we entered into a new amended and restated credit agreement, pursuant to which, among other things, the interest rates, amortization schedule and maturity date for our terms loans were amended. For additional information regarding the terms of the new amended and restated credit agreement, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources and Description of Other IndebtednessOur Senior Secured Credit Facilities. The new amended and restated credit agreement is filed with the Securities and Exchange Commission as an exhibit to the registration statement of which this prospectus forms a part.
We are a Delaware corporation, incorporated on March 9, 1989. Our principal executive offices are currently located at 865 South Figueroa Street, Suite 3400, Los Angeles, California 90017 and our telephone number is (213) 613-3226.
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Summary of Terms of the Exchange Offer
On May 22, 2003, we completed the private offering of the outstanding notes. References to the notes in this prospectus are references to both the outstanding notes and the exchange notes. This prospectus is part of a registration statement covering the exchange of the outstanding notes for the exchange notes.
We, Holding and some of our subsidiaries that are guarantors of the notes entered into a registration rights agreement with the initial purchasers in the private offering in which we and the guarantors agreed to deliver to you this prospectus as part of the exchange offer and we agreed to complete the exchange offer within 220 days after the date the Insignia acquisition was completed. You are entitled to exchange in the exchange offer your outstanding notes for exchange notes, which are identical in all material respects to the outstanding notes except:
| the exchange notes have been registered under the Securities Act of 1933; |
| the exchange notes are not entitled to certain registration rights which are applicable to the outstanding notes under the registration rights agreement; and |
| certain contingent interest rate provisions are no longer applicable. |
The Exchange Offer |
We are offering to exchange up to $200,000,000 aggregate principal amount of outstanding notes for up to $200,000,000 aggregate principal amount of exchange notes. Outstanding notes may be exchanged only in integral multiples of $1,000. |
Resale |
Based on an interpretation by the staff of the Securities and Exchange Commission, or the SEC, set forth in no-action letters issued to third parties, we believe that the exchange notes issued pursuant to the exchange offer in exchange for outstanding notes may be offered for resale, resold and otherwise transferred by you, unless you are an affiliate of CB Richard Ellis Services, Inc. within the meaning of Rule 405 under the Securities Act, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that you are acquiring the exchange notes in the ordinary course of your business and that you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the exchange notes. |
Each participating broker-dealer that receives exchange notes for its own account pursuant to the exchange offer in exchange for outstanding notes that were acquired as a result of market-making or other trading activity must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. See Plan of Distribution. |
Any holder of outstanding notes who: |
| is an affiliate of CB Richard Ellis Services, Inc.; |
| does not acquire exchange notes in the ordinary course of its business; or |
| tenders in the exchange offer with the intention to participate, or for the purpose of participating, in a distribution of exchange notes |
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cannot rely on the position of the staff of the SEC enunciated in Exxon Capital Holdings Corporation, Morgan Stanley & Co. Incorporated or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale of the exchange notes. |
Expiration Date; Withdrawal of Tender |
The exchange offer will expire at 5:00 p.m., New York City time, on , 2003, or such later date and time to which we extend it, which date we refer to as the expiration date. We do not currently intend to extend the expiration date. A tender of outstanding notes pursuant to the exchange offer may be withdrawn at any time prior to the expiration date. Any outstanding notes not accepted for exchange for any reason will be returned without expense to the tendering holder promptly after the expiration or termination of the exchange offer. |
Certain Conditions to the Exchange Offer |
The exchange offer is subject to customary conditions, which we may waive. Please read the section of this prospectus captioned The Exchange OfferCertain Conditions to the Exchange Offer for more information regarding the conditions to the exchange offer. |
Procedures for Tendering Outstanding Notes |
If you wish to participate in the exchange offer, you must complete, sign and date the accompanying letter of transmittal, or a facsimile of the letter of transmittal according to the instructions contained in this prospectus and the letter of transmittal. You must also mail or otherwise deliver the letter of transmittal, or a facsimile of the letter of transmittal, together with the outstanding notes and any other required documents, to the exchange agent at the address set forth on the cover page of the letter of transmittal. If you hold outstanding notes through The Depository Trust Company, or DTC, and wish to participate in the exchange offer, you must comply with the Automated Tender Offer Program procedures of DTC, by which you will agree to be bound by the letter of transmittal. By signing, or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things: |
| any exchange notes that you receive will be acquired in the ordinary course of your business; |
| you have no arrangement or understanding with any person or entity to participate in a distribution of the exchange notes; |
| if you are a broker-dealer that will receive exchange notes for your own account in exchange for outstanding notes that were acquired as a result of market-making activities, that you will deliver a prospectus, as required by law, in connection with any resale of such exchange notes; and |
| you are not an affiliate, as defined in Rule 405 of the Securities Act, of CB Richard Ellis Services, Inc. or, if you are an affiliate, you will comply with any applicable registration and prospectus delivery requirements of the Securities Act. |
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Special Procedures for Beneficial Owners |
If you are a beneficial owner of outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender such outstanding notes in the exchange offer, you should contact such registered holder promptly and instruct such registered holder to tender on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date. |
Guaranteed Delivery Procedures |
If you wish to tender your outstanding notes and your outstanding notes are not immediately available or you cannot deliver your outstanding notes, the letter of transmittal or any other documents required by the letter of transmittal or comply with the applicable procedures under DTCs Automated Tender Offer Program prior to the expiration date, you must tender your outstanding notes according to the guaranteed delivery procedures set forth in this prospectus under The Exchange OfferGuaranteed Delivery Procedures. |
Effect on Holders of Outstanding Notes |
As a result of the making of, and upon acceptance for exchange of all validly tendered outstanding notes pursuant to the terms of the exchange offer, we will have fulfilled a covenant contained in the registration rights agreement and, accordingly, there will be no increase in the interest rate on the outstanding notes under the circumstances described in the registration rights agreement. If you are a holder of outstanding notes and you do not tender your outstanding notes in the exchange offer, you will continue to hold such outstanding notes and you will be entitled to all the rights and limitations applicable to the outstanding notes in the indenture, except for any rights under the registration rights agreement that by their terms terminate upon the consummation of the exchange offer. |
To the extent that outstanding notes are tendered and accepted in the exchange offer, the trading market for outstanding notes could be adversely affected. |
Consequences of Failure to Exchange |
All untendered outstanding notes will continue to be subject to the restrictions on transfer provided for in the outstanding notes and in the indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the outstanding notes under the Securities Act. |
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Certain Income Tax Considerations |
The exchange of outstanding notes for exchange notes in the exchange offer will not be a taxable event for United States federal income tax purposes. See Certain U.S. Federal Income Tax Considerations. |
Use of Proceeds |
We will not receive any cash proceeds from the issuance of exchange notes pursuant to the exchange offer. |
Exchange Agent |
U.S. Bank National Association is the exchange agent for the exchange offer. The address and telephone number of the exchange agent are set forth in the section of this prospectus captioned The Exchange OfferExchange Agent. |
Summary of Terms of the Exchange Notes
Issuer |
CB Richard Ellis Services, Inc. |
Notes Offered |
$200,000,000 aggregate principal amount of 9 3/4% senior notes due May 15, 2010. |
Maturity Date |
May 15, 2010. |
Interest Payment Dates |
May 15 and November 15 of each year, beginning November 15, 2003. |
Optional Redemption |
We cannot redeem the notes prior to May 15, 2007, except as discussed below. Until May 15, 2006, we can choose to redeem the notes in an amount not to exceed 35% of the principal amount of the notes together with any additional notes issued under the indenture with money we or CBRE Holding raise in certain equity offerings, as long as: |
| we pay the holders of the notes a redemption price of 109 3/4% of the principal amount of the notes, plus accrued but unpaid interest to the date of redemption; |
| at least 65% of the aggregate principal amount of the notes, including any additional notes, remains outstanding after each such redemption; |
| if the money is raised in an equity offering by CBRE Holding, then CBRE Holding contributes to us an amount sufficient to redeem the notes; and |
| we redeem the notes within 90 days after the completion of the related equity offering. |
On or after May 15, 2007, we can redeem some or all of the notes at the redemption prices listed under the heading Description of the NotesOptional Redemption, plus accrued but unpaid interest to the date of redemption. |
Change of Control |
If a change of control occurs, we must give holders of the notes an opportunity to sell their notes to us at a purchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, subject to certain conditions. See Description of the NotesChange of Control. |
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Ranking |
The notes are our senior unsecured obligations. They rank equal in right of payment with our existing and future senior indebtedness and senior in right of payment to any of our existing and future subordinated indebtedness. The notes are effectively subordinated to all of our secured debt to the extent of the value of the assets securing such debt and structurally subordinated to all of the existing and future liabilities of our subsidiaries that do not guarantee the notes. As of June 30, 2003, on a pro forma basis after giving effect to the Insignia acquisition and the related transactions, we, excluding our subsidiaries, would have had approximately $491.3 million of senior indebtedness and $291.3 million of secured indebtedness; CBRE Holding would have had approximately $560.0 million of senior indebtedness and $291.3 million of secured indebtedness; our guarantor subsidiaries would have had approximately $641.7 million of senior indebtedness and $429.5 million of secured indebtedness; and our non-guarantor subsidiaries would have had $55.9 million of indebtedness. |
Guarantees |
CBRE Holding and each of our restricted subsidiaries that guaranteed our senior secured credit facilities have also fully and unconditionally guaranteed the notes on a senior unsecured basis. The guarantees by the guarantors of the notes are pari passu to all existing and future senior indebtedness of the guarantors. |
Restrictive Covenants |
The indenture governing the notes contains covenants that limit our ability and the ability of certain of our subsidiaries to: |
| incur or guarantee additional indebtedness; |
| pay dividends or distributions on capital stock or redeem or repurchase capital stock; |
| make investments; |
| create restrictions on the payment of dividends or other amounts to us; |
| sell stock of our subsidiaries; |
| transfer or sell assets; |
| create liens; |
| enter into sale/leaseback transactions; |
| enter into transactions with affiliates; and |
| enter into mergers or consolidations. |
At such time as the ratings assigned to the notes are investment grade ratings by both Moodys Investors Services and Standard and Poors Rating Group, the covenants above will cease to be in effect with the exception of the covenants that contain limitations on, among other things, the designation of restricted and unrestricted subsidiaries, liens, sale/leaseback transactions and certain consolidations, mergers |
9
and transfers of assets. All of these restrictions and prohibitions are subject to a number of important qualifications and exceptions. See Description of the NotesCertain Covenants. |
Absence of a Public Market for the Exchange Notes |
The exchange notes generally will be freely transferable but will also be new securities for which there will not initially be a market. Accordingly, we cannot assure you whether a market for the exchange notes will develop or as to the liquidity of any market. We do not intend to apply for a listing of the exchange notes on any securities exchange or automated dealer quotation system. The initial purchasers in the private offering of the outstanding notes have advised us that they currently intend to make a market in the exchange notes. However, they are not obligated to do so, and any market making with respect to the exchange notes may be discontinued without notice. |
Risk Factors
You should carefully consider the risk factors set forth under the caption of Risk Factors beginning on page 15 and the other information included in this prospectus before tendering your outstanding notes in the exchange offer.
10
Summary Historical and Pro Forma Financial Data
CB Richard Ellis Services
The following table is a summary of our historical consolidated financial data as of and for the periods presented, as well as pro forma financial data giving effect to the Insignia acquisition and the related transactions as of and for the periods presented. You should read this data along with the information included under the captions Managements Discussion and Analysis of Financial Condition and Results of Operations and Unaudited Pro Forma Combined Financial Information and the financial statements and related notes included elsewhere in this prospectus. The pro forma statement of operations data do not purport to represent what the results of operations of CB Richard Ellis Services, Inc. would have been if the Insignia acquisition and the related transactions had occurred as of the date indicated or what its results will be for future periods. The results include the activities of the following acquired businesses since their respective dates of acquisition: REI, Ltd. from April 17, 1998; and CB Hillier Parker Limited from July 7, 1998.
As of December 31, |
As of June 30, 2003 |
Pro Forma As of June 30, 2003 | |||||||||||||||||||
1998 |
1999 |
2000 |
2001 |
2002 |
|||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||
Balance Sheet Data: |
|||||||||||||||||||||
Cash and cash equivalents |
$ | 19,551 | $ | 27,844 | $ | 20,854 | $ | 57,447 | $ | 79,574 | $ | 23,009 | $ | 92,291 | |||||||
Total assets |
856,892 | 929,483 | 963,105 | 1,273,360 | 1,284,953 | 1,517,265 | 1,929,017 | ||||||||||||||
Long-term debt (including current portion) |
388,896 | 364,637 | 314,164 | 472,630 | 459,981 | 655,148 | 730,148 | ||||||||||||||
Total liabilities |
660,175 | 715,874 | 724,018 | 997,449 | 976,745 | 1,225,947 | 1,517,699 | ||||||||||||||
Total stockholders equity |
190,842 | 209,737 | 235,339 | 271,615 | 302,593 | 285,237 | 405,237 |
Twelve Months Ended December 31, |
Six Months Ended June 30, |
Pro Forma 2002(2) |
Pro Forma Six 2003(2) |
|||||||||||||||||||||||||||||||||
1998 |
1999 |
2000 |
2001(1) |
2002(2) |
2002(2) |
2003(2) |
||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||||||||||||
Revenue |
$ | 1,034,503 | $ | 1,213,039 | $ | 1,323,604 | $ | 1,170,762 | $ | 1,170,277 | $ | 508,883 | $ | 585,441 | $ | 1,744,162 | $ | 865,566 | ||||||||||||||||||
Operating income |
$ | 78,476 | $ | 76,899 | $ | 107,285 | $ | 49,058 | $ | 106,477 | $ | 32,417 | $ | 36,390 | $ | 130,159 | $ | 37,304 | ||||||||||||||||||
Interest expense, net |
$ | 27,993 | $ | 37,438 | $ | 39,146 | $ | 38,962 | $ | 46,043 | $ | 23,993 | $ | 23,704 | $ | 71,973 | $ | 34,142 | ||||||||||||||||||
Net income (loss) |
$ | 24,557 | $ | 23,282 | $ | 33,388 | $ | (11,299 | ) | $ | 27,306 | $ | 4,288 | $ | 7,553 | $ | 25,051 | $ | 1,010 | |||||||||||||||||
Other Data: |
||||||||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 76,005 | $ | 70,340 | $ | 80,859 | $ | (29,206 | ) | $ | 64,373 | $ | (41,187 | ) | $ | (73,964 | ) | | | |||||||||||||||||
Net cash (used in) provided by investing activities |
$ | (222,911 | ) | $ | (23,096 | ) | $ | (32,469 | ) | $ | (118,651 | ) | $ | (24,130 | ) | $ | (16,210 | ) | $ | 2,396 | | | ||||||||||||||
Net cash provided by (used in) financing activities |
$ | 119,438 | $ | (37,721 | ) | $ | (53,523 | ) | $ | 185,487 | $ | (17,453 | ) | $ | 18,752 | $ | 13,698 | | | |||||||||||||||||
Ratio of earnings to fixed charges |
2.17 | x | 1.79 | x | 2.16 | x | 1.18 | x | 1.86 | x | 1.25 | x | 1.28 | x | 1.54 | x | 0.97 | x(3) | ||||||||||||||||||
EBITDA (4) |
$ | 110,661 | $ | 117,369 | $ | 150,484 | $ | 86,912 | $ | 131,091 | $ | 44,120 | $ | 48,890 | $ | 173,338 | $ | 58,984 |
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(1) | The 2001 data provided has been derived by combining our activity for the period January 1, 2001 through July 20, 2001 (the date of our acquisition by CBRE Holding) with the activity of CBRE Holding (excluding CBRE Holdings parent stand-alone activity) for the period from February 20, 2001 (inception) through December 31, 2001. |
(2) | The 2002 and 2003 data provided have been derived by excluding CBRE Holdings parent-only stand-alone activity for the period. |
EBITDA is calculated as follows:
Twelve Months Ended December 31, |
Six Months Ended June 30, |
Pro Forma 2002 |
Pro Forma Six 2003 | ||||||||||||||||||||||||
1998 |
1999 |
2000 |
2001 |
2002 |
2002 |
2003 |
|||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||
Operating income |
$ | 78,476 | $ | 76,899 | $ | 107,285 | $ | 49,058 | $ | 106,477 | $ | 32,417 | $ | 36,390 | $ | 130,159 | $ | 37,304 | |||||||||
Add: |
|||||||||||||||||||||||||||
Depreciation and amortization |
32,185 | 40,470 | 43,199 | 37,854 | 24,614 | 11,703 | 12,500 | 43,179 | 21,680 | ||||||||||||||||||
EBITDA |
$ | 110,661 | $ | 117,369 | $ | 150,484 | $ | 86,912 | $ | 131,091 | $ | 44,120 | $ | 48,890 | $ | 173,338 | $ | 58,984 | |||||||||
(3) | Additional earnings of $1.9 million would be needed to have a one-to-one ratio of earnings to fixed charges. |
(4) | EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization. We believe that the presentation of EBITDA will enhance an investors understanding of our operating performance. EBITDA is also a measure used by our senior management to evaluate the performance of our various lines of business and for other required or discretionary purposes, such as our use of EBITDA as a significant component when measuring performance under our employee incentive programs. Additionally, many of our debt covenants are based upon a measurement similar to EBITDA. EBITDA should not be considered as an alternative to (a) operating income determined in accordance with accounting principles generally accepted in the United States or (b) operating cash flow determined in accordance with accounting principles generally accepted in the United States. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies. |
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CBRE Holding
The following table is a summary of the historical consolidated financial data of CBRE Holding as of and for the periods presented, as well as pro forma financial data giving effect to the Insignia acquisition and the related transactions as of and for the periods presented. You should read this data along with the information included under the captions Managements Discussion and Analysis of Financial Condition and Results of Operations and Unaudited Pro Forma Combined Financial Information and the financial statements and related notes included elsewhere in this prospectus. The pro forma statement of operations data do not purport to represent what CBRE Holdings results of operations would have been if the Insignia acquisition and the related transactions had occurred as of the date indicated or what its results will be for future periods.
As of December 31, 2002 |
As of June 30, 2003 |
Pro Forma as of June 30, 2003 | |||||||
(Dollars in thousands) | |||||||||
Balance Sheet Data: |
|||||||||
Cash and cash equivalents |
$ | 79,701 | $ | 23,018 | $ | 92,300 | |||
Total assets |
1,324,876 | 1,561,901 | 1,966,671 | ||||||
Long-term debt (including current portion) |
521,844 | 718,492 | 793,492 | ||||||
Total liabilities |
1,067,920 | 1,303,148 | 1,594,900 | ||||||
Total stockholders equity |
251,341 | 252,672 | 365,690 |
Twelve Months Ended December 31, |
Six Months Ended June 30, |
Pro Forma for the Twelve Months Ended |
Pro Forma for the Six Months Ended |
||||||||||||||||
2002 |
2002 |
2003 |
2002 |
2003 |
|||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Statement of Operations Data: |
|||||||||||||||||||
Revenue |
$ | 1,170,277 | $ | 508,883 | $ | 585,441 | $ | 1,744,162 | $ | 865,566 | |||||||||
Operating income |
106,062 | 32,177 | 36,234 | 129,744 | 33,838 | ||||||||||||||
Interest expense, net |
57,229 | 29,523 | 29,488 | 83,159 | 39,926 | ||||||||||||||
Net income (loss) |
18,727 | 1,194 | 3,825 | 16,472 | (4,704 | ) | |||||||||||||
Other Data: |
|||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 64,882 | $ | (40,132 | ) | $ | (74,555 | ) | | | |||||||||
Net cash (used in) provided by investing activities |
(24,130 | ) | (16,210 | ) | 2,396 | | | ||||||||||||
Net cash (used in) provided by financing activities |
(17,838 | ) | 17,910 | 14,171 | | | |||||||||||||
Ratio of earnings to fixed charges |
1.61 | 1.08 | 1.11 | 1.39 | 0.87 | (1) | |||||||||||||
EBITDA (2) |
$ | 130,676 | $ | 43,880 | $ | 48,734 | $ | 172,923 | $ | 55,518 |
(1) | Additional earnings of $7.9 million would be needed to have a one-to-one ratio of earnings to fixed charges. |
(2) | EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization. We believe that the presentation of EBITDA will enhance an investors understanding of CBRE Holdings operating performance. EBITDA is also a measure used by our senior management to evaluate the performance of our various lines of business and for other required or discretionary purposes, such as our use of EBITDA as a significant component when measuring performance under our employee incentive programs. Additionally, many of CBRE Holdings debt covenants are based upon a measurement similar to EBITDA. EBITDA should not be considered as an alternative to (a) operating income determined in accordance with accounting principles generally accepted in the United States or (b) operating cash flow determined in accordance with accounting principles generally accepted in the United States. CBRE Holdings calculation of EBITDA may not be comparable to similarly titled measures reported by other companies. |
13
EBITDA is calculated as follows:
Twelve Months Ended December 31, |
Six Months Ended June 30, |
Pro Forma for the Twelve Months Ended |
Pro Forma for the Six Months Ended June 30, | ||||||||||||
2002 |
2002 |
2003 |
2002 |
2003 | |||||||||||
(Dollars in thousands) | |||||||||||||||
Operating income |
$ | 106,062 | $ | 32,177 | $ | 36,234 | $ | 129,744 | $ | 33,838 | |||||
Add: |
|||||||||||||||
Depreciation and amortization |
24,614 | 11,703 | 12,500 | 43,179 | 21,680 | ||||||||||
EBITDA |
$ | 130,676 | $ | 43,880 | $ | 48,734 | $ | 172,923 | $ | 55,518 | |||||
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You should carefully consider the risks described below and the other information in this prospectus before you decide to participate in the exchange offer. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.
Risks Relating to the Exchange Offer
If you choose not to exchange your outstanding notes, the present transfer restrictions will remain in force and the market price of your outstanding notes could decline.
If you do not exchange your outstanding notes for exchange notes under the exchange offer, then you will continue to be subject to the transfer restrictions on the outstanding notes as set forth in the prospectus distributed in connection with the private offering of the outstanding notes. In general, the outstanding notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act. You should refer to Prospectus SummarySummary of Terms of the Exchange Offer and The Exchange Offer for information about how to tender your outstanding notes.
The tender of outstanding notes under the exchange offer will reduce the principal amount of the outstanding notes outstanding, which may have an adverse effect upon, and increase the volatility of, the market price of the outstanding notes due to a reduction in liquidity.
Risks Relating to Our Business
The success of our business is significantly related to general economic conditions and, accordingly, our business could be harmed in the event of an economic slowdown or recession.
During 2001 and 2002, we continued to be adversely affected by the slowdown in the global economy, which negatively impacted the commercial real estate market. This caused a decline in leasing activities within the United States, which was only partially offset by improved overall revenues in Europe and Asia. During the first half of 2003, lower leasing revenues in the United States were offset by improved revenues from consulting fees and sales of investment properties in the United States and Europe, as well as improved appraisal fees in the United States.
Moreover, in part because of the terrorist attacks on September 11, 2001 and the subsequent outbreak of hostilities, as well as the conflict with Iraq and the risk of conflict with North Korea, the economic climate in the United States and abroad remains uncertain, which may have a further adverse effect on commercial real estate market conditions and, in turn, our operating results.
Periods of economic slowdown or recession in the United States and in other countries, rising interest rates, a declining demand for real estate or the public perception that any of these events may occur, can harm many segments of our business. These economic conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and brokerage commissions derived from property sales and leases. In addition, these conditions could lead to a decline in sales prices as well as a decline in demand for funds invested in commercial real estate and related assets. A further or continued economic downturn or a significant increase in interest rates also may reduce the amount of loan originations and related servicing by the commercial mortgage banking business. If the brokerage and mortgage banking businesses are negatively impacted, it is likely that the other lines of business would also suffer due to the relationship among the various business lines. Further, as a result of our debt level, the terms of our existing debt instruments and the terms of the debt instruments entered into in connection with the Insignia acquisition and the related transactions, our exposure to adverse general economic conditions is heightened.
15
If the properties that we manage fail to perform, then our financial condition and results of operations could be harmed.
The revenue we generate from our asset services and facilities management lines of business is generally a percentage of aggregate rent collections from properties, although many management agreements provide for a specified minimum management fee. Accordingly, our success partially depends upon the performance of the properties we manage. The performance of these properties will depend upon the following factors, among others, many of which are partially or completely outside of our control:
| our ability to attract and retain creditworthy tenants; |
| the magnitude of defaults by tenants under their respective leases; |
| our ability to control operating expenses; |
| governmental regulations, local rent control or stabilization ordinances which are in, or may be put into, effect; |
| various uninsurable risks; |
| financial conditions prevailing generally and in the areas in which these properties are located; |
| the nature and extent of competitive properties; and |
| the real estate market generally. |
Our growth has depended significantly upon acquisitions, which may not be available in the future, may result in integration problems and may not perform as we expected.
A significant component of our growth has occurred through acquisitions. Any future growth through acquisitions will be partially dependent upon the continued availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions. However, future acquisitions may not be available at advantageous prices or upon favorable terms and conditions. In addition, acquisitions involve risks that the businesses acquired will not perform in accordance with expectations and that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect.
We have had, and may continue to experience, difficulties in integrating operations and accounting systems acquired from other companies. These difficulties include the diversion of managements attention from other business concerns and the potential loss of our key employees or those of the acquired operations. We believe that most acquisitions will initially have an adverse impact on operating and net income. We may experience these difficulties in integrating Insignias business into our existing business segments. In addition, we generally believe that, as a result of acquisitions, there will be significant costs related to integrating information technology, accounting and management services and rationalizing personnel levels. In connection with the Insignia acquisition, we anticipate recording significant charges during 2003 relating to integration costs. Accordingly, we may not be able to effectively manage acquired businesses and some acquisitions may not have an overall benefit.
We have several different accounting systems as a result of acquisitions we have made. Insignias accounting systems are also different from ours. If we are unable to fully integrate the accounting and other systems of the businesses we own, we may not be able to effectively manage our acquired businesses. Moreover, the integration process itself may be disruptive to business as it requires coordination of geographically diverse organizations and implementation of new accounting and information technology systems.
We cannot assure you as to when or if we will be able to achieve all of our expected cost savings in connection with the Insignia acquisition.
Our decision to pursue the Insignia acquisition was based in part on our belief that there are significant cost-saving opportunities for us. After performing a detailed review of Insignias and our operations to identify areas of overlap, we have formulated a detailed integration plan in order to achieve these expected cost savings.
16
We cannot assure you as to when or if all of the cost savings we expect to achieve in connection with the Insignia acquisition will be realized. A variety of risks could cause us not to achieve the benefits of the expected cost savings, including, among others, the following:
| higher than expected severance costs related to staff reductions; |
| higher than expected lease termination payments in respect of closing redundant facilities; |
| delays in the anticipated timing of activities related to the integration plan; |
| unanticipated increases in corporate overhead; and |
| other unexpected costs associated with operating the combined business. |
If we fail to realize the expected benefits of the cost savings for these or other reasons, the results of operations of the combined company, as well as our liquidity, could be adversely affected.
We agreed to retain contingent liabilities in connection with Insignias sale of substantially all of its real estate investment assets.
Immediately prior to the completion of the Insignia acquisition on July 23, 2003, Insignia completed the sale of substantially all of its real estate investment assets to Island Fund I, LLC (Island Fund). These real estate investment assets were comprised of minority investments in operating real estate assets including office, retail, industrial, apartment and hotel properties, minority investments in office development projects, wholly owned or consolidated investments in real property and investments in real estate-related private equity funds. Under the terms of the purchase agreement that we entered into with Island Fund, we agreed to retain some contingent liabilities related to the real estate investment assets that were sold, and these contingent liabilities could result in material adverse effects on our future financial condition and results of operations. The retained contingent liabilities include the following:
| Letter of Credit and Repayment Guarantee Support. As of the closing of the sale to Island Fund, Insignia had provided an aggregate of approximately $10.2 million of letter of credit support for real estate investment assets that were subject to the purchase agreement, as well as a guarantee of approximately a $1.3 million repayment obligation with respect to one of the real estate investment assets. Pursuant to the purchase agreement, we agreed to maintain each of these letters of credit until the earlier of (1) the third anniversary of the completion of the sale to Island Fund, (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. Also pursuant to the purchase agreement, Island Fund 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 Funds reimbursement obligation. As a result of these arrangements, we retained potential liability for 50% of any future draws against these letters of credit and the repayment guarantee. In addition, there can be no assurance that Island Fund will be able to reimburse us in the event of any draws against the letters of credit or the repayment guarantee or that Island Funds future reimbursement obligations will not exceed the amount of the letter of credit provided to us by Island Fund. |
| Indemnification Obligation. In connection with the sale of the real estate investment assets to Island Fund, we generally agreed to indemnify Island Fund against any losses resulting from the ownership, use or operation of the real estate investment assets prior to the closing of the sale, as well as any losses resulting from any action, or failure to act when action was required, by us with respect to the real estate investment assets prior to the closing. Although this indemnification obligation to Island Fund is subject to a number of exceptions and limitations, future claims against us pursuant to this indemnification obligation may be material. |
17
Although Island Fund has agreed to indemnify us with respect to certain losses related to the real estate investment assets, we may not be able to obtain such indemnification from Island Fund in the future.
In connection with the sale of the real estate investment assets, Island Fund generally agreed to indemnify us against any losses resulting from the ownership, use or operation of the real estate investment assets after the closing of the sale, as well as any losses resulting from any action, or failure to act when action was required, by Island Fund with respect to the real estate investment assets after the closing. In addition, a number of the real estate investment assets that we agreed to sell to Island Fund required the consent of one or more third parties in order to transfer such assets to Island Fund and some of these third party consents were not obtained prior to the closing. As a result, we continue to hold these real estate investment assets pending the receipt of these third party consents. While we continue to hold these assets, we generally have agreed to provide Island Fund with the economic benefits from these assets and Island Fund generally has agreed to indemnify us with respect to any losses incurred in connection with our continuing to hold these assets. With respect to any of the Island Fund indemnification obligations described above, however, there can be no assurance that Island Fund actually will provide, or be able to provide, such indemnification if required to do so at any future date. If Island Fund does not, or is unable to, indemnify us against these potential losses, our future financial condition and results of operations may be adversely impacted.
We have numerous significant competitors, some of which may have greater financial resources than we do.
We compete across a variety of business disciplines within the commercial real estate industry, including investment management, tenant representation, corporate services, construction and development management, property management, agency leasing, valuation and mortgage banking. In general, with respect to each of our business disciplines, we cannot assure you that we will be able to continue to compete effectively, maintain our current fee arrangements or margin levels or not encounter increased competition. Each of the business disciplines in which we compete is highly competitive on an international, national, regional and local level. Although we are one of the largest real estate services firms in the world in terms of revenue, our relative competitive position varies significantly across product and service categories and geographic areas. Depending on the product or service, we face competition from other real estate service providers, institutional lenders, insurance companies, investment banking firms, investment managers and accounting firms. Many of our competitors are local or regional firms, which are substantially smaller than we are; however, they may be substantially larger on a local or regional basis. We are also subject to competition from other large national and multi-national firms.
Our international operations subject us to social, political and economic risks of doing business in foreign countries.
We conduct a substantial portion of our business and employ a substantial number of employees outside of the United States. During the six-month period ended June 30, 2003, we generated approximately 29% of our revenue from operations outside the United States. During the six-month period ended June 30, 2003, Insignia generated approximately 31% of its revenue from operations outside the United States. Circumstances and developments related to international operations that could negatively affect our business, financial condition or results of operations include, but are not limited to, the following factors:
| difficulties and costs of staffing and managing international operations; |
| currency restrictions, which may prevent the transfer of capital and profits to the United States; |
| unexpected changes in regulatory requirements; |
| potentially adverse tax consequences; |
| the responsibility of complying with multiple and potentially conflicting laws; |
18
| the impact of regional or country-specific business cycles and economic instability; |
| the geographic, time zone, language and cultural differences among personnel in different areas of the world; |
| greater difficulty in collecting accounts receivable in some geographic regions such as Asia, where many countries have underdeveloped insolvency laws and clients are often slow to pay, and in some European countries, where clients also tend to delay payments; |
| political instability; and |
| foreign ownership restrictions with respect to operations in countries such as China. |
We have committed additional resources to expand our worldwide sales and marketing activities, to globalize our service offerings and products in selected markets and to develop local sales and support channels. If we are unable to successfully implement these plans, to maintain adequate long-term strategies that successfully manage the risks associated with our global business or to adequately manage operational fluctuations, our business, financial condition or results of operations could be harmed.
In addition, our international operations and, specifically, the ability of our non-U.S. subsidiaries to dividend or otherwise transfer cash among our subsidiaries, including transfers of cash to pay interest and principal on our debt, may be affected by limitations on imports, currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other things.
Our revenue and earnings may be adversely affected by foreign currency fluctuations.
Our revenue from non-U.S. operations has been primarily denominated in the local currency where the associated revenue was earned. During the six-month period ended June 30, 2003, approximately 29% of our business was transacted in currencies of foreign countries, the majority of which included the Euro, the British Pound Sterling, the Hong Kong dollar, the Singapore dollar and the Australian dollar. During the six-month period ended June 30, 2003, approximately 31% of Insignias revenues were generated by its foreign subsidiaries, a substantial number of which transact their business in currencies of foreign countries. Thus, we may experience fluctuations in revenues and earnings because of corresponding fluctuations in foreign currency exchange rates.
We have made significant acquisitions of non-U.S. companies and may acquire additional foreign companies in the future. As we increase our foreign operations, fluctuations in the value of the U.S. dollar relative to the other currencies in which we may generate earnings could adversely affect our business, operating results and financial condition. Due to the constantly changing currency exposures to which we will be subject and the volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon future operating results. In addition, fluctuations in currencies relative to the U.S. dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations.
From time to time, our management uses currency hedging instruments, including foreign currency forward and option contracts and borrows in foreign currencies. Economic risks associated with these hedging instruments include unexpected fluctuations in inflation rates, which impact cash flow relative to paying down debt, and unexpected changes in the underlying net asset position. These hedging activities also may not be effective.
A significant portion of our operations are concentrated in California and New York, and our business could be harmed if the economic downturn continues in the California or New York real estate markets.
For the six-month period ended June 30, 2003, on a pro forma basis giving effect to the Insignia acquisition and related transactions, a significant amount of our sales and lease revenue, including revenue from investment property sales, was generated from transactions originating in the State of California. In addition, for the
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six-month period ended June 30, 2003, on the same pro forma basis, a significant amount of our sales and lease revenue, including revenue from investment property sales but excluding revenue from real estate principal investment activities and residential real estate services, was generated from transactions originating in the greater New York metropolitan area. As a result of the geographic concentration in California and New York, a continuation of the economic downturn in the California and New York commercial real estate markets and in the local economies in San Diego, Los Angeles, Orange County or the greater New York metropolitan area could further harm our results of operations.
Our co-investment activities subject us to real estate investment risks which could cause fluctuations in earnings and cash flow.
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, 2003, on a pro forma basis giving effect to the Insignia acquisition and related transactions, we had committed an additional $33.1 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. Although our and CBRE Holdings debt instruments contain restrictions that will limit our ability to provide capital to the entities holding direct or indirect interests in co-investments, we may provide this capital in some instances.
Participation in real estate transactions through co-investment activity could increase fluctuations in earnings and cash flow. Other risks associated with these activities include, but are not limited to, the following:
| losses from investments; |
| difficulties associated with international co-investments described in Our international operations subject us to social, political and economic risks of doing business in foreign countries and Our revenue and earnings may be adversely affected by foreign currency fluctuations; and |
| potential lack of control over the disposition of any co-investments and the timing of the recognition of gains, losses or potential incentive participation fees. |
We may incur liabilities related to our subsidiaries being general partners of numerous general and limited partnerships.
We have subsidiaries that are general partners in numerous general and limited partnerships that invest in or manage real estate assets in connection with our co-investments, including several partnerships involved in the acquisition, rehabilitation, subdivision and sale of multi-tenant industrial business parks. Any subsidiary that is a general partner is potentially liable to our partners and for the obligations of the partnership, including those obligations related to environmental contamination of properties owned or managed by the partnership. If our exposure as a general partner is not limited, or if the exposure as a general partner expands in the future, any resulting losses may harm our business, financial condition or results of operations.
Our joint venture activities involve unique risks that are often outside of our control which, if realized, could harm our business.
We have utilized joint ventures for large commercial investments, initiatives in Internet-related technology and local brokerage partnerships. In the future, we may acquire interests in additional limited and general partnerships and other joint ventures formed to own or develop real property or interests in real property. We have acquired and may continue to acquire minority interests in joint ventures. Additionally, we may also acquire interests as a passive investor without rights to actively participate in management of the joint ventures. Investments in joint ventures involve additional risks, including, but not limited to, the following:
| the other participants may become bankrupt or have economic or other business interests or goals that are inconsistent with ours; and |
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| we may not have the right or power to direct the management and policies of the joint ventures and other participants may take action contrary to our instructions or requests and against our policies and objectives. |
If a joint venture participant acts contrary to our interest, it could harm our business, results of operations and financial condition.
Our success depends upon the retention of our senior management, as well as our ability to attract and retain qualified and experienced employees.
Our continued success is highly dependent upon the efforts of our executive officers and other key employees. The members of our senior management that are parties to employment agreements are Raymond E. Wirta, our Chief Executive Officer; Brett White, our President; Kenneth J. Kay, our Chief Financial Officer; Stephen Siegel, our Chairman, Global Brokerage; Mitchell Rudin, our President, U.S. Brokerage Services; and Alan Froggatt, our Chief Executive Officer, EMEA. If any of our key employees leave and we are unable to quickly hire and integrate a qualified replacement, our business, financial condition and results of operations may suffer. In addition, the growth of our business is largely dependent upon our ability to attract and retain qualified personnel in all areas of our business, including brokerage and property management personnel. If we are unable to attract and retain these qualified personnel, our growth may be limited and our business and operating results could suffer.
If we fail to comply with laws and regulations applicable to real estate brokerage and mortgage transactions and other segments of our business, we may incur significant financial penalties.
Due to the broad geographic scope of our operations and the numerous forms of real estate services performed, we are subject to numerous federal, state and local laws and regulations specific to the services performed. For example, the brokerage of real estate sales and leasing transactions requires us to maintain brokerage licenses in each state in which we operate. If we fail to maintain our licenses or conduct brokerage activities without a license, we may be required to pay fines or return commissions received or have licenses suspended. In addition, because the size and scope of real estate sales transactions have increased significantly during the past several years, both the difficulty of ensuring compliance with the numerous state licensing regimes and the possible loss resulting from non-compliance have increased. Furthermore, the laws and regulations applicable to our business, both in the United States and in foreign countries, also may change in ways that materially increase the costs of compliance.
We may have liabilities in connection with real estate brokerage and property management activities.
As a licensed real estate broker, we and our licensed employees are subject to statutory due diligence, disclosure and standard-of-care obligations. Failure to fulfill these obligations could subject us or our employees to litigation from parties who purchased, sold or leased properties we or they brokered or managed. We could become subject to claims by participants in real estate sales claiming that we did not fulfill our statutory obligations as a broker.
In addition, in our property management business, we hire and supervise third-party contractors to provide construction and engineering services for our managed properties. While our role is limited to that of a supervisor, we may be subjected to claims for construction defects or other similar actions. Adverse outcomes of property management litigation could negatively impact our business, financial condition or results of operations.
We are controlled by affiliates of Blum Capital Partners, L.P., whose interests may be different from yours.
We are a wholly owned subsidiary of CBRE Holding. As of September 30, 2003, Blum Strategic Partners, L.P., Blum Strategic Partners II, L.P. and Blum Strategic Partners II GmbH & Co. KG together owned
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approximately 67.2% of CBRE Holdings outstanding Class A and Class B common stock, taken together. In addition, these investment funds, which are affiliates of Blum Capital Partners, L.P., previously entered into a securityholders agreement with the other holders of Class B common stock and some of the holders of Class A common stock. The Class A and Class B common stock subject to the voting provisions of the securityholders agreement represented as of the date of the closing of the Insignia acquisition approximately 98.7% of the voting power of CBRE Holdings outstanding Class A and Class B common stock, taken together. As a result of the percentage of CBRE Holdings voting power owned by the affiliates of Blum Capital Partners, L.P. and the other parties to the securityholders agreement and the rights granted to these investment funds pursuant to the securityholders agreement, CBRE Holding is controlled by these affiliates of Blum Capital Partners, L.P., which control has, among other things, the effects indicated below.
| General Voting: Subject to exceptions in the securityholders agreement, these funds control the outcome of all votes of holders of CBRE Holdings Class A and Class B common stock, taken together. |
| Board of Directors: These funds have the right to designate a majority of the members of CBRE Holdings board of directors. |
| Change of Control: These funds generally are able to prevent any transaction that would result in a change of control of CBRE Holding. Subject to exceptions in the securityholders agreement, they are also able to cause a change of control. |
We cannot assure you that the interests of the funds affiliated with Blum Capital Partners, L.P. will not conflict with yours. In particular, these funds may cause a change of control at a time when we do not have sufficient funds to repurchase the notes as described under Description of the NotesChange of Control.
Our results of operations vary significantly among quarters, which makes comparison of our quarterly results difficult.
A significant portion of our revenue is seasonal. Historically, this seasonality has caused our revenue, operating income, net income and cash flow from operating activities to be lower in the first two quarters and higher in the third and fourth quarters of each year. The concentration of earnings and cash flow in the fourth quarter is due to an industry-wide focus on completing transactions toward the fiscal year-end, while incurring constant, non-variable expenses throughout the year. This has historically resulted in lower profits or a loss in the first and second quarters, with profits growing (or losses decreasing) in each subsequent quarter.
Risks Relating to Our Substantial Indebtedness
Our substantial leverage and debt service obligations could harm our ability to operate our business, remain in compliance with debt covenants and make payments on our debt, including the notes.
We are highly leveraged and have significant debt service obligations. For the year ended December 31, 2002 and for the six months ended June 30, 2003, in each case, after giving effect to the Insignia acquisition and the related transactions, on a pro forma basis, CBRE Holdings annual interest expense would have been $91.9 million and $43.1 million, respectively. Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal of, interest on or other amounts due in respect of our indebtedness. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in the documents governing our indebtedness. If we incur additional debt, the risks associated with our substantial leverage, including our ability to service our debt, would increase.
Our substantial debt could have other important consequences, which include, but are not limited to, the following:
| We could be required to use a substantial portion, if not all, of our free cash flow from operations to pay principal and interest on our debt. |
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| Our level of debt may restrict us from raising additional financing on satisfactory terms to fund working capital, strategic acquisitions, investments, joint ventures and other general corporate requirements. |
| Our interest expense could increase if interest rates increase, because all of our debt under the new amended and restated credit agreement governing our senior secured credit facilities, including $300.0 million in term loans and a revolving credit facility of up to $90.0 million, bears interest at floating rates, generally between LIBOR plus 3.00% to 3.75% or the alternate base rate plus 2.00% to 2.75%. The alternate base rate is the higher of (1) Credit Suisse First Bostons prime rate and (2) the Federal Funds Effective Rate plus 0.50%. |
| Our substantial leverage could increase our vulnerability to general economic downturns and adverse competitive and industry conditions, placing us at a disadvantage compared to those of our competitors that are less leveraged. |
| Our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and in the real estate services industry. |
| Our failure to comply with the financial and other restrictive covenants in the documents governing our indebtedness, which, among others, require us to maintain specified financial ratios and limit our ability to incur additional debt and sell assets, could result in an event of default that, if not cured or waived, could harm our business or prospects and could result in our filing for bankruptcy. |
We cannot be certain that our earnings will be sufficient to allow us to pay principal and interest on our debt, including the notes, and meet our other obligations. If we do not have sufficient earnings, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell more securities, none of which we can guarantee we will be able to do.
We will be able to incur more indebtedness, which may intensify the risks associated with our substantial leverage, including our ability to service our indebtedness.
The indenture relating to the notes, the amended and restated credit agreement governing our senior secured credit facilities and the indentures relating to our 11 1/4% senior subordinated notes due 2011 and the 16% senior notes due 2011 issued by CBRE Holding permit us, subject to specified conditions, to incur a significant amount of additional indebtedness, including additional indebtedness under our $90.0 million revolving credit facility. If we incur additional debt, the risks associated with our substantial leverage, including our ability to service our debt, would increase.
Servicing our indebtedness requires a significant amount of cash, and our ability to generate cash depends on many factors beyond our control.
We expect to obtain from our operations the cash necessary to make payments on the notes, our senior secured credit facilities, our 11 1/4% senior subordinated notes due 2011, the 16% senior notes due 2011 issued by CBRE Holding, and to fund our working capital, strategic acquisitions, investments, joint ventures and other general corporate requirements. Our ability to generate cash from our operations is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. As a result, we cannot assure you that our business will generate sufficient cash flow from operations, that we will realize currently anticipated cost savings, revenue growth and operating improvements on schedule or at all or that future borrowings will be available to us under our revolving credit facility, in each case, in amounts sufficient to enable us to service our debt and to fund our other liquidity needs. If we cannot service our debt, we will have to take actions such as reducing or delaying strategic acquisitions, investments and joint ventures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all. In addition, the terms of our and CBRE Holdings existing or future debt instruments, including our senior secured credit facilities, the indenture for the notes and the indentures for our 11 1/4% senior subordinated notes due 2011 and the 16% senior
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notes due 2011 issued by CBRE Holding, may restrict us from adopting any of these alternatives. Because of these and other factors beyond our control, we may be unable to pay the principal, premium, if any, interest or other amounts on the notes.
Our and CBRE Holdings debt instruments impose significant operating and financial restrictions on us and CBRE Holding, and in the event of a default, all of our and CBRE Holdings borrowings would become immediately due and payable.
The indentures governing the notes, our 11 1/4% senior subordinated notes due 2011 and the 16% senior notes due 2011 issued by CBRE Holding impose, and the terms of any future debt may impose, operating and other restrictions on CBRE Holding and on us and many of our subsidiaries. These restrictions will affect, and in many respects will limit or prohibit, the ability of CBRE Holding and of us and our restricted subsidiaries to:
| incur or guarantee additional indebtedness; |
| pay dividends or distributions on capital stock or redeem or repurchase capital stock; |
| repurchase equity interests; |
| make investments; |
| create restrictions on the payment of dividends or other amounts to us; |
| sell stock of subsidiaries; |
| transfer or sell assets; |
| create liens; |
| enter into transactions with affiliates; |
| enter into sale/leaseback transactions; and |
| enter into mergers or consolidations. |
In addition, the new amended and restated credit agreement governing our senior secured credit facilities includes other and more restrictive covenants and prohibits us from prepaying most of our other debt while debt under our senior secured credit facilities is outstanding. The new amended and restated credit agreement governing our senior secured credit facilities also requires us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control.
The restrictions contained in our and CBRE Holdings debt instruments could:
| limit CBRE Holdings and our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and |
| adversely affect CBRE Holdings and our ability to finance ongoing operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that would be in our interest. |
A breach of any of these restrictive covenants or the inability to comply with the required financial ratios could result in a default under our and CBRE Holdings debt instruments. If any such default occurs, the lenders under the senior secured credit facilities and the holders of the notes, our 11 1/4% senior subordinated notes due 2011 and the 16% senior notes due 2011 issued by CBRE Holding, pursuant to the respective indentures, may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. The lenders under our senior secured credit facilities also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under the senior secured credit facilities will have the right to proceed against the collateral granted to them to secure the debt, which includes our available cash. If the debt under the senior secured credit facilities, the notes, our 11 1/4% senior subordinated notes due 2011 and the 16% senior notes due 2011 were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full the notes and our other debt.
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We conduct a substantial portion of our operations through our subsidiaries and may be limited in our ability to access funds from these subsidiaries to service our debt, including the notes.
We conduct a substantial portion of our operations through our subsidiaries and depend to a large degree upon dividends and other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations, including the notes. Our subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available to us for these payments, unless they are guarantors of the notes. In addition, the ability of our subsidiaries to pay dividends and make other payments to us may be restricted by, among other things, applicable corporate and other laws, transfer pricing regulations, limitations on imports, currency exchange control regulations, potentially adverse tax consequences and agreements of our subsidiaries. Although the indentures governing the notes, our 11 1/4% senior subordinated notes due 2011 and the 16% senior notes due 2011 issued by CBRE Holding limit the ability of our subsidiaries to enter into consensual restrictions on their ability to pay dividends and make other payments, the limitations are subject to a number of significant qualifications and exceptions. See Description of the NotesCertain CovenantsLimitation on Restrictions on Distributions from Restricted Subsidiaries. If we are unable to access the cash flow of our subsidiaries, we may have difficulty meeting our debt obligations.
If we fail to meet our payment or other obligations under the senior secured credit facilities, the lenders under the senior secured credit facilities could foreclose on, and acquire control of, substantially all of our assets.
In connection with the incurrence of indebtedness under our senior secured credit facilities and the completion of the Insignia acquisition, the lenders under our senior secured credit facilities received a pledge of all of our equity interests and those of CBRE Holdings significant domestic subsidiaries, including us, CBRE Investors, L.L.C., L.J. Melody & Company, Insignia Financial Group, Inc. and Insignia/ESG, Inc., which was subsequently renamed CB Richard Ellis Real Estate Services, Inc., and 65% of the voting stock of CBRE Holdings foreign subsidiaries that is held directly by CBRE Holding or its domestic subsidiaries. Additionally, these lenders generally have a lien on substantially all of our accounts receivable, cash, general intangibles, investment property and future acquired material property. As a result of these pledges and liens, if we fail to meet our payment or other obligations under the senior secured credit facilities, the lenders under the senior secured credit facilities would be entitled to foreclose on substantially all of our assets and liquidate these assets. Under those circumstances, we may not have sufficient funds to pay principal, premium, if any, and interest on the notes. As a result, the holders of the notes may lose a portion of, or the entire value of, their investment.
Risks Relating to the Notes
We may not have the ability to raise the funds necessary to finance a change of control offer.
Upon the occurrence of a change of control, we will be required to offer to repurchase all of the notes. We cannot assure you that there will be sufficient funds available for us to make any required repurchases of the notes upon a change of control. In addition, the amended and restated credit agreement governing our senior secured credit facilities will provide that the occurrence of a change of control constitutes a default. Our failure to purchase tendered notes would constitute a default under the indenture governing the notes, which, in turn, would constitute a default under the senior secured credit facilities. See Description of the NotesChange of Control.
A subsidiary guarantee could be voided if it constitutes a fraudulent transfer under U.S. bankruptcy or similar state law, which would prevent the holders of the notes from relying on that subsidiary to satisfy claims.
Under U.S. bankruptcy law and comparable provisions of state fraudulent transfer laws, a subsidiary guarantee can be voided, or claims under the subsidiary guarantee may be subordinated to all other debts of that subsidiary guarantor if, among other things, the subsidiary guarantor, at the time it incurred the indebtedness evidenced by its subsidiary guarantee or, in some states, when payments become due under the subsidiary guarantee, received less than reasonably equivalent value or fair consideration for the incurrence of the subsidiary guarantee and:
| was insolvent or rendered insolvent by reason of such incurrence; |
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| was engaged in a business or transaction for which the subsidiary guarantors remaining assets constituted unreasonably small capital; or |
| intended to incur, or believed that it would incur, debts beyond its ability to pay those debts as they mature. |
A subsidiary guarantee may also be voided, without regard to the above factors, if a court found that the subsidiary guarantor entered into the subsidiary guarantee with the actual intent to hinder, delay or defraud its creditors.
A court would likely find that a subsidiary guarantor did not receive reasonably equivalent value or fair consideration for its subsidiary guarantee if the subsidiary guarantor did not substantially benefit directly or indirectly from the issuance of the notes. If a court were to void a subsidiary guarantee, you would no longer have a claim against the subsidiary guarantor. Sufficient funds to repay the notes may not be available from other sources, including the remaining guarantors, if any. In addition, the court might direct you to repay any amounts that you already received from the subsidiary guarantor.
The measures of insolvency for purposes of fraudulent transfer laws vary depending upon the governing law. Generally, a subsidiary guarantor would be considered insolvent if:
| the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets; |
| the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they became absolute and mature; or |
| it could not pay its debts as they became due. |
Each subsidiary guarantee will contain a provision intended to limit the subsidiary guarantors liability to the maximum amount that it could incur without causing the incurrence of obligations under its subsidiary guarantee to be a fraudulent transfer. This provision may not be effective to protect the subsidiary guarantees from being voided under fraudulent transfer law.
The notes are not guaranteed by all of our subsidiaries.
The notes have not been guaranteed by a number of our subsidiaries and Insignias subsidiaries. As a result, if we default on our obligations under the notes, you will not have any claims against any of our subsidiaries that do not provide guarantees of the notes. For the six-month period ended June 30, 2003, revenues of our non-guarantor subsidiaries constituted approximately 28.5% of our consolidated revenue, operating income of such non-guarantor subsidiaries was $1.7 million and EDITDA of such non-guarantor subsidiaries was $5.7 million. As of June 30, 2003, the total assets of such subsidiaries constituted approximately 21.1% of our consolidated total assets, and the total liabilities (excluding intercompany loans payable) of such subsidiaries were $182.1 million. Upon the closing of the Insignia acquisition, our obligations under the notes were guaranteed by the subsidiaries that conduct Insignias domestic commercial service operations (including the operations of Insignia/ESG, Inc., which is now known as CB Richard Ellis Real Estate Services, Inc., and unallocated administrative expenses and corporate assets of Insignia). For the six-month period ended June 30, 2003, revenues of Insignias subsidiaries that conduct its other operations (comprised of international service operations and real estate investment operations), which will not guarantee our obligations under the notes, constituted approximately 31.5% of Insignias consolidated revenues, operating loss of such subsidiaries was $(1.6) million and EBITDA of such subsidiaries was $1.0 million. As of June 30, 2003, the total assets of such subsidiaries constituted approximately 51.1% of Insignias consolidated total assets, and the liabilities (excluding intercompany payables) of such subsidiaries were $130.5 million. See note 12 to CBRE Holdings June 30, 2003 consolidated financial statements and note 14 to Insignias June 30, 2003 consolidated financial statements included elsewhere in this prospectus.
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Your ability to recover from our former auditors, Arthur Andersen LLP, for any potential financial misstatements is limited.
On April 23, 2002, at the recommendation of our audit committee, we dismissed Arthur Andersen LLP as our independent public accountants and engaged Deloitte & Touche LLP to serve as our independent public accountants for fiscal year 2002. The audited consolidated financial statements of CBRE Holding as of December 31, 2001 and for the period from February 20, 2001 (inception) through December 31, 2001 and the audited consolidated financial statements of CB Richard Ellis Services for the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000, which are included in this prospectus, have been audited by Arthur Andersen, our former independent public accountants, as set forth in their report, but Arthur Andersen has not consented to our use of their report in this prospectus.
Arthur Andersen completed its audit of our consolidated financial statements for the year ended December 31, 2001 and issued its report relating to these consolidated financial statements on February 26, 2002. Subsequently, Arthur Andersen was convicted of obstruction of justice for the activities relating to its previous work for another of its audit clients and has ceased to audit publicly-held companies. We are unable to predict the impact of this conviction or whether other adverse actions may be taken by governmental or private entities against Arthur Andersen. If Arthur Andersen has no assets available for creditors, you may not be able to recover against Arthur Andersen for any claims you may have under securities or other laws as a result of Arthur Andersens previous role as our independent public accountants and as author of the audit report for some of the audited financial statements included in this prospectus.
We cannot assure you that an active trading market will develop for the exchange notes.
We do not intend to apply for a listing of the exchange notes on a securities exchange. There is currently no established market for the exchange notes and we cannot assure you as to:
| the liquidity of any market that may develop for the exchange notes; |
| the ability of holders of exchange notes to sell their exchange notes; and |
| the price at which holders of exchange notes will be able to sell their exchange notes. |
Although the initial purchasers of the outstanding notes have advised us that they intend to make a market for the exchange notes, the initial purchasers are not obligated to do so, and may discontinue their market making at any time without notice to the holders of the exchange notes. In addition, market making activity may be limited during the pendency of the exchange offer or the effectiveness of a shelf registration statement. Accordingly, we cannot assure you as to the development or liquidity of any market for the exchange notes. If a market for the exchange notes does develop, prevailing interest rates, the markets for similar securities and other factors could cause the exchange notes to trade at prices lower than their initial market values or reduce the liquidity of the exchange notes.
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This prospectus includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. The words anticipate, believe, could, should, propose, continue, estimate, expect, intend, may, plan, predict, project, will and similar terms and phrases are used in this prospectus to identify forward-looking statements. The forward-looking statements in this prospectus include, but are not limited to, statements under the captions Prospectus Summary, Risk Factors, Unaudited Pro Forma Financial Information, Managements Discussion and Analysis of Financial Condition and Results of Operations and Business regarding our future financial condition, prospects, developments and business strategies. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. For the forward-looking statements included in this prospectus, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are made based on our managements expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These uncertainties and factors could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.
The following factors are among those that may cause actual results to differ materially from the forward-looking statements:
| changes in general economic and business conditions; |
| the failure of properties managed by us to perform as anticipated; |
| our ability to successfully integrate our businesses with those of other businesses we acquire; |
| our ability to achieve expected cost savings in connection with the Insignia acquisition; |
| competition; |
| changes in social, political and economic conditions in the foreign countries in which we operate; |
| foreign currency fluctuations; |
| a continuation of the economic downturn in the California and New York real estate markets; |
| the success of our co-investment activities; |
| risks associated with our subsidiaries being general partners of numerous general and limited partnerships; |
| the success of our joint venture activities; |
| our ability to retain our senior management and attract and retain qualified and experienced employees; |
| our ability to comply with the laws and regulations applicable to real estate brokerage and mortgage transactions; |
| our exposure to liabilities in connection with real estate brokerage and property management activities; |
| control by our majority shareholders; |
| significant variability in our results of operations among quarters; |
| our substantial leverage and debt service obligations; |
| our ability to incur additional indebtedness; and |
| our ability to generate a sufficient amount of cash to service our existing and future indebtedness. |
All of the forward-looking statements should be considered in light of these factors. We do not undertake any obligation to update our forward-looking statements or the risk factors contained in this prospectus to reflect new information or future events or otherwise.
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CB Richard Ellis Services, CBRE Holding and the other guarantors of the outstanding notes will not receive any cash proceeds from the issuance of the exchange notes. In consideration for issuing the exchange notes as contemplated in this prospectus, CB Richard Ellis Services will receive in exchange a like principal amount of outstanding notes, the terms of which are identical in all material respects to the exchange notes. The outstanding notes surrendered in exchange for the exchange notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the exchange notes will not result in any change in our capitalization.
The net proceeds we received from the offering of the outstanding notes, together with cash, borrowings under an amended and restated credit agreement, the proceeds from the sale of real estate investment assets by Insignia to Island Fund and the equity contributions by certain of CBRE Holdings existing stockholders were used:
| to pay the holders of Insignias common stock, consideration of $11.156 per share in connection with the Insignia acquisition; |
| to pay the holder of Insignias preferred stock consideration of $100.00 per share plus all accrued and unpaid dividends; |
| to pay holders of all options and warrants, whether vested or unvested, the amount by which $11.156 exceeded the per share exercise price of such option or warrant, if at all, except with respect to options granted pursuant to Insignias 1998 Stock Incentive Plan, the holders or which received the amount by which $11.20 exceeded the per share exercise price of such option or warrant, if at all; |
| to pay certain severance and similar obligations to senior management and other former employees of Insignia and its subsidiaries pursuant to their employment agreements or Insignia employee benefit plans; |
| to repay substantially all of Insignias outstanding indebtedness prior to its acquisition by us; |
| to pay fees and expenses associated with the Insignia acquisition and related transactions; and |
| for working capital and other general corporate purposes. |
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The following table sets forth the cash and cash equivalents and capitalization of CBRE Holding as of June 30, 2003:
| on an actual basis; and |
| on a pro forma as adjusted basis to reflect the consummation of the Insignia acquisition and the related transactions, including our receipt of (1) the net proceeds from the issuance of the notes, (2) the borrowings of additional tranche B term loans under an amended and restated credit agreement governing our senior secured credit facilities and (3) the equity contribution to CBRE Holding of $120.0 million by certain of its existing stockholders. |
As of June 30, 2003 |
||||||||
Actual |
Pro Forma As Adjusted |
|||||||
(Dollars in thousands) | ||||||||
Cash and cash equivalents (1) |
$ | 23,018 | $ | 108,709 | ||||
Current maturities of long-term debt |
$ | 10,760 | $ | 11,510 | ||||
Long-term debt, excluding current portion: |
||||||||
CB Richard Ellis Services: |
||||||||
Term loan facilities (2) |
206,013 | 280,263 | ||||||
9 3/4% senior notes due 2010 |
200,000 | 200,000 | ||||||
11 1/4% senior subordinated notes due 2011 (3) |
226,055 | 226,055 | ||||||
Other long-term debt |
12,320 | 12,320 | ||||||
Total long-term debt, excluding current portion, of CB Richard Ellis Services and its subsidiaries |
644,388 | 718,638 | ||||||
CBRE Holding: |
||||||||
16% senior notes due 2011 (4) |
63,344 | 63,344 | ||||||
Total long-term debt, excluding current portion, of CBRE Holding and its subsidiaries |
707,732 | 781,982 | ||||||
Stockholders equity: |
||||||||
Class A common stock; $0.01 par value; 75,000,000 shares authorized; 1,835,123 shares issued and outstanding, actual; 1,835,123 shares issued and outstanding, pro forma as adjusted |
18 | 27 | ||||||
Class B common stock; $0.01 par value; 25,000,000 authorized; 12,624,813 shares issued and outstanding, actual; 20,124,813 shares issued and outstanding, pro forma as adjusted |
127 | 193 | ||||||
Additional paid-in capital |
241,475 | 361,400 | ||||||
Notes receivable from sale of stock |
(4,762 | ) | (4,762 | ) | ||||
Accumulated earnings |
39,978 | 32,996 | ||||||
Accumulated other comprehensive loss |
(22,272 | ) | (22,272 | ) | ||||
Treasury stock at cost, 120,174 shares |
(1,892 | ) | (1,892 | ) | ||||
Total stockholders equity |
252,672 | 365,690 | ||||||
Total capitalization |
$ | 971,164 | $ | 1,159,182 | ||||
(1) | The pro forma as adjusted amount of cash and cash equivalents includes $16.4 million of restricted cash. |
(2) | On October 14, 2003, we refinanced our term loan facilities, which among other things, resulted in an increase in our outstanding term loan facility debt, including current portions, to $300.0 million as of such date. See Prospectus SummaryRecent Developments. This refinancing is not reflected in the pro forma as adjusted capitalization of CBRE Holding. |
(3) | The amount shown is net of unamortized discount of $2.9 million associated with the issuance of our 11 1/4% senior subordinated notes due 2011. |
(4) | The amount shown is net of unamortized discount of $5.0 million associated with the issuance of CBRE Holdings 16% senior notes dues 2011. |
30
THE INSIGNIA ACQUISITION AND RELATED TRANSACTIONS
Insignia Acquisition. We offered and sold the outstanding notes in connection with our acquisition of Insignia, which was completed on July 23, 2003. Upon the terms and subject to the conditions set forth in an amended and restated merger agreement dated as of May 28, 2003 among us, CBRE Holding, Apple Acquisition Corp. and Insignia, each share of Insignias outstanding common stock was converted in the acquisition into the right to receive $11.156 in cash. Also in connection with the acquisition, each share of Insignias outstanding Series A preferred stock and Series B preferred stock was cancelled and converted into the right to receive a cash payment of $100.00, plus accrued and unpaid dividends. The merger agreement relating to the Insignia acquisition further provided for the termination of all of Insignias vested and unvested options, except for options granted under Insignias 1998 Stock Incentive Plan, and warrants to acquire Insignia common stock in consideration of a cash payment to the holder of each option or warrant of the excess, if any, of the $11.156 consideration paid per share of common stock in the Insignia acquisition over the exercise price of the option or warrant. With respect to the options granted under Insignias 1998 Stock Incentive Plan, the merger agreement provided for the termination of all of such vested and unvested options in consideration of a cash payment to the holder of each such option of the excess, if any, of the highest closing sale price of Insignia common stock on the New York Stock Exchange during the 60-day period immediately prior to the closing of the Insignia acquisition, which was $11.20 per share, over the exercise price of such option. As a result of this acquisition, we own all of the outstanding capital stock of Insignia.
Sale of Residential Real Estate Services Subsidiaries. On March 14, 2003, Insignia completed the sale of its residential real estate services subsidiaries, Insignia Douglas Elliman LLC and Insignia Residential Group LLC, to Montauk Battery Realty, LLC for $66.8 million in cash, $0.5 million in cash held in escrow, up to $0.5 million in cash to be held in escrow until receipt of pending commissions and the assumption of an existing earn-out obligation of Insignia of up to $4.0 million. All escrowed amounts will be made available to satisfy any indemnity claims against Insignia by Montauk Battery Realty, and will otherwise be released from escrow on March 14, 2004. Insignia used the net cash proceeds from this sale to reduce its outstanding indebtedness.
Sale of Real Estate Investment Assets. Pursuant to the merger agreement relating to the Insignia acquisition, Insignia had the right, but not the obligation, to market for sale to third parties specified real estate investment assets that we refer to in this prospectus as the real estate investment assets. The real estate investment assets consisted of Insignia subsidiaries and joint ventures that held minority investments in office, retail, industrial, apartment and hotel properties, minority investments in office development projects and a related parcel of undeveloped land, wholly owned or consolidated investments in Norman, Oklahoma, New York City and the U.S. Virgin Islands, and investments in two private equity funds that invest primarily in mortgage-backed debt securities.
On May 28, 2003, we, Insignia and Island Fund I LLC entered into a purchase agreement that provided for the sale of substantially all of the real estate investment assets to Island Fund. The sale to Island Fund was completed immediately prior to the completion of the Insignia acquisition on July 23, 2003. In connection with the sale, Island Fund paid cash proceeds to us of approximately $36.9 million and assumed approximately $7.9 million of contingent payment obligations that Insignia otherwise would have been obligated to pay to certain of its executive officers as a result of the completion of the Insignia acquisition. See Risk FactorsRisks Related to Our BusinessWe agreed to retain contingent liabilities in connection with Insignias sale of substantially all of its real estate investment assets and Risk FactorsRisks Related to Our BusinessAlthough Island Fund has agreed to indemnify us with respect to certain losses related to the real estate investment assets, we may not be able to obtain such indemnification from Island Fund in the future.
Equity Financing. To partially finance the transactions contemplated by the merger agreement, we and CBRE Holding entered into a subscription agreement with certain of CBRE Holdings existing stockholders, including investment funds affiliated with Blum Capital Partners, L.P., investment funds affiliated with Credit Suisse First Boston, California Public Employees Retirement System and Frederic Malek, who is a director of
31
CBRE Holding. Pursuant to this agreement, these stockholders contributed $120.0 million of cash to CBRE Holding in exchange for shares of common stock of CBRE Holding, including an aggregate of approximately $105.4 million by the affiliates of Blum Capital Partners, L.P. Immediately prior to the completion of the Insignia acquisition, CBRE Holding contributed $100.0 million of the $120.0 million to us.
As a result of these equity contributions, as of September 30, 2003 the investment funds affiliated with Blum Capital Partners, L.P. beneficially own approximately 76.2% of CBRE Holdings outstanding shares of Class B common stock and approximately 67.2% of CBRE Holdings outstanding shares of Class A and Class B common stock, taken together. In connection with any matter to be decided by CBRE Holdings stockholders, shares of Class B common stock have 10 votes per share and shares of Class A common stock have one vote per share. For additional information regarding the beneficial ownership of CBRE Holding common stock, you should read the information in the section of this prospectus titled Principal Stockholders.
Application of Proceeds. The net proceeds from the offering of the outstanding notes, together with the cash contributions from CBRE Holdings existing stockholders, the borrowings of additional tranche B term loans under an amended and restated credit agreement governing our senior secured credit facilities and the cash proceeds from Island Fund, were used as follows at the closing of the Insignia acquisition:
| to pay the holders of Insignias common stock, preferred stock, warrants and options the consideration described above; |
| to repay all existing loans under Insignias existing senior credit agreement and senior subordinated credit agreement, each of which was terminated in connection with these repayments; |
| to pay certain severance and similar obligations to senior management and other former employees of Insignia and its subsidiaries pursuant to their employment agreements or Insignia employee benefit plans; and |
| to pay fees and expenses associated with the acquisition and the related debt and equity financings. |
CBRE Holdings existing 16% senior notes due 2011 and our existing 11 1/4% senior subordinated notes due 2011 remained outstanding after the Insignia acquisition. For additional information regarding the terms of CBRE Holdings existing senior notes, our existing senior subordinated notes and the senior secured credit facilities, you should read the information included under the caption Description of Other Indebtedness. For additional information regarding the use of proceeds received in connection with the offering of the outstanding notes, you should read the information included under the caption Use of Proceeds in this prospectus.
32
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is based on the historical financial statements of CBRE Holding and Insignia included elsewhere in this prospectus. The unaudited pro forma combined balance sheet as of June 30, 2003 gives effect to the Insignia acquisition and the related transactions, excluding the sale by Insignia of its residential real estate services subsidiaries, as if they had occurred on June 30, 2003. The unaudited pro forma combined statements of operations for the twelve months ended December 31, 2002 and the six months ended June 30, 2003 give effect to the Insignia acquisition and the related transactions, excluding the sale by Insignia of its residential real estate services subsidiaries, as if they had occurred on January 1, 2002. We refer to the Insignia acquisition and related transactions, excluding the sale by Insignia of its residential real estate services subsidiaries, as the pro forma transactions. Insignias historical financial statements that are included elsewhere in this prospectus present Insignias residential real estate subsidiaries, which were sold by Insignia on March 14, 2003, as discontinued operations. See note 6 to Insignias June 30, 2003 consolidated financial statements and note 3 to Insignias 2002 consolidated financial statements included elsewhere in this prospectus.
This unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what CBRE Holdings results of operations or financial position actually would have been had the Insignia acquisition and the related transactions in fact occurred on the dates specified, nor does the information purport to project CBRE Holdings results of operations or financial position for any future period or at any future date. All pro forma adjustments are based on preliminary estimates and assumptions and are subject to revision upon finalization of the purchase accounting for the Insignia acquisition and the related transactions.
Once we have completed the valuation studies necessary to finalize the required purchase price allocations in connection with the Insignia acquisition and identified any changes necessary to conform Insignias financial presentation to ours, the unaudited pro forma financial information will be subject to adjustment. Such adjustments will likely result in changes to the unaudited pro forma combined balance sheet and the unaudited pro forma combined statements of operations to reflect, among other things, the final allocation of the purchase price. There can be no assurance that such changes will not be material.
The unaudited pro forma financial information does not reflect any adjustments for synergies that CBRE Holding expects to realize commencing upon consummation of the Insignia acquisition. No assurances can be made as to the amount of cost savings or revenue enhancements, if any, that may be realized.
The unaudited financial information does not given effect to the recently completed refinancing of our senior secured credit facilities. For additional information regarding this refinancing, see Prospectus SummaryRecent Developments.
The unaudited pro forma financial information should be read in conjunction with the other information contained in this prospectus under the captions Prospectus SummarySummary Historical and Pro Forma Financial Data, The Insignia Acquisition and Related Transactions, Capitalization, Selected Historical Financial Data and Managements Discussion and Analysis of Financial Conditions and Results of Operations and the respective financial statements of CBRE Holding and Insignia and the related notes included elsewhere in this prospectus.
33
CBRE HOLDING, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of June 30, 2003
(in thousands, except per share data)
Historical |
Pro Forma Adjustments |
Pro Forma Combined | |||||||||||||||
CBRE Holding |
Insignia |
Disposition of Real Estate Investment Assets (a) |
Insignia Acquisition |
||||||||||||||
ASSETS |
|||||||||||||||||
Current Assets: |
|||||||||||||||||
Cash and cash equivalents |
$ | 21,163 | $ | 55,991 | $ | 35,329 | $ | (20,183 | )(b)(d) | $ | 92,300 | ||||||
Restricted cash |
1,855 | 21,153 | (6,599 | ) | | 16,409 | |||||||||||
Receivables, net of allowance |
154,224 | 133,082 | (1,577 | ) | | 285,729 | |||||||||||
Warehouse receivable |
138,240 | | | | 138,240 | ||||||||||||
Prepaid expenses |
19,623 | 10,547 | (93 | ) | (1,334 | )(c) | 28,743 | ||||||||||
Deferred tax assets, net |
19,758 | | | | 19,758 | ||||||||||||
Other current assets |
14,143 | | | | 14,143 | ||||||||||||
Total current assets |
369,006 | 220,773 | 27,060 | (21,517 | ) | 595,322 | |||||||||||
Cash held in escrow |
200,000 | | | (200,000 | )(d) | | |||||||||||
Property and equipment, net |
68,959 | 42,140 | (147 | ) | (5,587 | )(e) | 105,365 | ||||||||||
Goodwill |
577,137 | 260,565 | | (83,333 | )(c)(f)(g) | 754,369 | |||||||||||
Other intangible assets, net |
89,494 | 4,684 | | 97,990 | (h) | 192,168 | |||||||||||
Deferred compensation assets |
69,533 | | | | 69,533 | ||||||||||||
Investment in and advances to unconsolidated subsidiaries |
57,691 | | | | 57,691 | ||||||||||||
Real estate investments, net |
| 131,411 | (128,373 | ) | | 3,038 | |||||||||||
Deferred tax assets, net |
35,972 | 62,086 | (2,922 | ) | (19,016 | )(i) | 76,120 | ||||||||||
Other assets |
94,109 | 12,590 | (1,501 | ) | 7,867 | (j) | 113,065 | ||||||||||
Total assets |
$ | 1,561,901 | $ | 734,249 | $ | (105,883 | ) | $ | (223,596 | ) | $ | 1,966,671 | |||||
LIABILITIES & STOCKHOLDERS EQUITY |
|||||||||||||||||
Current Liabilities: |
|||||||||||||||||
Accounts payable and accrued expenses |
$ | 98,096 | $ | 50,120 | $ | (7,659 | ) | $ | 22,621 | (k) | $ | 163,178 | |||||
Compensation and employee benefits payable |
61,491 | 61,693 | (7 | ) | | 123,177 | |||||||||||
Accrued bonus and profit sharing |
49,853 | 13,958 | (431 | ) | | 63,380 | |||||||||||
Income taxes payable |
| 3,609 | | | 3,609 | ||||||||||||
Short Term Borrowings: |
|||||||||||||||||
Warehouse line of credit |
138,240 | | | | 138,240 | ||||||||||||
Revolver and swingline credit facility |
11,250 | | | | 11,250 | ||||||||||||
Other short term borrowings |
56,149 | | | | 56,149 | ||||||||||||
Total short-term borrowings |
205,639 | | | | 205,639 | ||||||||||||
Current maturities of long term debt |
10,760 | | | 750 | (l) | 11,510 | |||||||||||
Total current liabilities |
425,839 | 129,380 | (8,097 | ) | 23,371 | 570,493 |
34
Historical |
Pro Forma Adjustments |
Pro Forma Combined |
||||||||||||||||||
CBRE Holding |
Insignia |
Disposition of Real Estate Investment Assets (a) |
Insignia Acquisition |
|||||||||||||||||
Long-term Liabilities: |
||||||||||||||||||||
Senior secured term loans |
206,013 | | | 74,250 | (l) | 280,263 | ||||||||||||||
Notes payable |
| 43,000 | | (43,000 | )(l) | | ||||||||||||||
Real estate mortgage notes |
| 71,986 | (71,986 | ) | | | ||||||||||||||
9 3/4% senior notes of CB Richard Ellis Services |
200,000 | | | | 200,000 | |||||||||||||||
11 1/4% senior subordinated notes of CB Richard Ellis Services |
226,055 | | | | 226,055 | |||||||||||||||
16% senior notes of CBRE Holding |
63,344 | | | | 63,344 | |||||||||||||||
Other long-term debt |
12,320 | | | | 12,320 | |||||||||||||||
Total long-term debt |
707,732 | 114,986 | (71,986 | ) | 31,250 | 781,982 | ||||||||||||||
Deferred compensation liability |
112,741 | 17,229 | | | 129,970 | |||||||||||||||
Deferred tax liabilities |
| 23,396 | (752 | ) | (22,644 | )(i) | | |||||||||||||
Other liabilities |
56,836 | 28,763 | | 26,856 | (m) | 112,455 | ||||||||||||||
Total liabilities |
1,303,148 | 313,754 | (80,835 | ) | 58,833 | 1,594,900 | ||||||||||||||
Minority interest |
6,081 | | | | 6,081 | |||||||||||||||
Stockholders Equity: |
||||||||||||||||||||
Preferred Stock, $0.01 par value, 20,000,000 shares authorized, 250,000 Series A shares and 125,000 Series B shares issued and outstandingactual, no shares issued and outstanding pro forma |
| 4 | | (4 | )(n) | | ||||||||||||||
Class A common stock; $0.01 par value; 75,000,000 shares authorized; 1,835,123 shares issued and outstanding (including treasury shares) actual, 2,687,988 issued and outstanding (including treasury shares) pro forma. |
18 | | | 9 | (n) | 27 | ||||||||||||||
Class B common stock; $0.01 par value; 25,000,000 shares authorized; 12,624,813 shares issued and outstandingactual, 19,271,948 shares issued and outstanding pro forma |
127 | | | 66 | (n) | 193 | ||||||||||||||
Common Stock, par value $.01 per share80,000,000 shares authorized, 24,082,121 shares issued and outstanding, net of 1,502,600 shares held in treasuryactual, no shares issued and outstanding pro forma |
| 241 | | (241 | )(n) | | ||||||||||||||
Additional paid-in capital |
241,475 | 443,101 | | (323,176 | )(n) | 361,400 | ||||||||||||||
Notes receivable from sale of stock |
(4,762 | ) | (1,006 | ) | | 1,006 | (n) | (4,762 | ) | |||||||||||
Accumulated earnings (deficit) |
39,978 | (24,104 | ) | (25,048 | ) | 42,170 | (n) | 32,996 | ||||||||||||
Accumulated other comprehensive income (loss) |
(22,272 | ) | 2,259 | | (2,259 | )(n) | (22,272 | ) | ||||||||||||
Treasury stock at cost |
(1,892 | ) | | | | (1,892 | ) | |||||||||||||
Total stockholders equity |
252,672 | 420,495 | (25,048 | ) | (282,429 | ) | 365,690 | |||||||||||||
Total liabilities & stockholders equity |
$ | 1,561,901 | $ | 734,249 | $ | (105,883 | ) | $ | (223,596 | ) | $ | 1,966,671 | ||||||||
The accompanying notes are an integral part of these financial statements.
35
Notes to Unaudited Pro Forma Combined Balance Sheet
as of June 30, 2003
(a) | Reflects the sale of the real estate investment assets by Insignia to Island Fund I, LLC for cash consideration of approximately $36.9 million, which gives effect to the assumption by Island Fund I, LLC of certain contingent obligations. This disposition was completed immediately prior to the closing of the Insignia acquisition. Accordingly, the difference between the proceeds from the disposition of the real estate investment assets and their historical book value has been recorded as an adjustment to Insignias historical equity. |
Cash and cash equivalents of $35.3 million related to the disposition of the real estate investment assets consist of the following:
(in thousands) |
||||
Historical cash and cash equivalents related to disposed real estate investment assets |
$ | (1,541 | ) | |
Proceeds from the sale of the real estate investment assets |
36,870 | |||
Cash and cash equivalentsreal estate investment asset dispositions |
$ | 35,329 | ||
(b) | Reflects the net effect of the pro forma transactions on cash and cash equivalents as follows: |
(in thousands) |
||||
Sources: |
||||
Additional tranche B term loan borrowings (note (l)) |
$ | 75,000 | ||
9 3/4% senior notes due May 15, 2010 |
200,000 | |||
Equity contribution from CBRE Holding stockholders (note (n)) |
120,000 | |||
Total sources |
$ | 395,000 | ||
Uses: |
||||
Purchase of outstanding shares of Insignia (24,108,533 shares at $11.156 per share, net of repayment of notes receivable from sale of stock, note (f)) |
$ | (266,903 | ) | |
Purchase of Series A and Series B preferred shares of Insignia (375,000 shares at $100.00 per share plus accrued and unpaid dividends, note (f)) |
(38,244 | ) | ||
Settlement of outstanding stock options and warrants of Insignia (note (f)) |
(7,923 | ) | ||
Change of control, severance payments and other |
(23,168 | ) | ||
Payment of transaction costs, net of financing costs (note (f)) |
(16,598 | ) | ||
Repayment of Insignias senior credit facility (note (l)) |
(28,000 | ) | ||
Repayment of Insignias subordinated credit facility (note (l)) |
(15,000 | ) | ||
Payment of financing costs (note (j)) |
(19,347 | ) | ||
Total uses |
(415,183 | ) | ||
Change in cash and cash equivalents |
$ | (20,183 | ) | |
We anticipate incurring approximately $213.3 million in expenditures associated with the pro forma transactions. These expenditures include change of control payments, employee severance, facilities closure costs, retention payments, integration costs, financing costs, capital expenditures and other transaction costs. The payment schedule for, and accounting treatment of, such costs is expected to be as follows:
Paid By Closing |
Paid Over Time |
Total Costs | |||||||
(in thousands) | |||||||||
Record as goodwill |
$ | 41,100 | $ | 54,620 | $ | 95,720 | |||
Expense as incurred |
1,300 | 74,800 | 76,100 | ||||||
Record as deferred financing costs/property and equipment |
19,347 | 11,000 | 30,347 | ||||||
Payout of deferred compensation liability |
| 11,100 | 11,100 | ||||||
Total |
$ | 61,747 | $ | 151,520 | $ | 213,267 | |||
36
The pro forma cash and cash equivalents balance of $92.3 million as of June 30, 2003 is higher than what we would have had historically as of June 30, 2003. This excess cash balance is the result of the borrowing at the closing of the Insignia acquisition and related transactions of the entire $75.0 million principal balance of the additional tranche B term loan and the release from escrow at the closing of the Insignia acquisition and related transactions of the net proceeds from the offering of $200.0 million in aggregate principal amount of the 9 3/4% senior notes for purposes of the accompanying unaudited pro forma combined balance sheet. In addition, we have not assumed the application of the $36.9 million in proceeds from the sale of the real estate investment assets for any particular use. We anticipate the incurrence of non-recurring expenditures associated with the integration of Insignias businesses and expect that this excess cash will be utilized to fund these integration costs.
(c) | Represents the adjustment to reflect the reclassification of transaction costs related to the Insignia acquisition paid by us through June 30, 2003 (increase to goodwill). |
(d) | In accordance with the terms of the indenture governing our $200.0 million in aggregate principal amount 9 3/4% senior notes, the proceeds from the sale of these notes were placed in escrow until the close of the Insignia acquisition. This adjustment reflects the reclassification of these proceeds to cash. |
(e) | Represents adjustment to acquired property and equipment to reflect its estimated fair market value as of the date of the Insignia acquisition. |
(f) | The Insignia acquisition is being accounted for under the purchase method of accounting. Accordingly, the total purchase price is being allocated to the assets acquired and the liabilities assumed based upon their respective estimated fair values. A preliminary allocation of the purchase price has been made to major categories of assets and liabilities in the unaudited pro forma combined balance sheet based on our preliminary assessment. The final allocation of the purchase price may result in significant differences from the pro forma amounts included in this unaudited pro forma combined financial information. |
The following represents the calculation of the purchase price of the Insignia acquisition and the excess purchase price over the estimated fair value of net assets acquired:
(in thousands) |
||||
Purchase of outstanding shares of Insignia, net (24,108,533 shares at $11.156 per share) |
$ | 266,903 | ||
Purchase of Series A and Series B preferred shares of Insignia (375,000 shares at $100.00 per share plus accrued and unpaid dividends) |
38,244 | |||
Settlement of outstanding stock options and warrants of Insignia |
7,923 | |||
Transaction costs, net of financing costs |
20,300 | |||
Total purchase price |
333,370 | |||
Less: estimated fair value of net assets acquired (see table below) |
(156,138 | ) | ||
Excess purchase price over estimated fair value of net assets acquired |
$ | 177,232 | ||
37
Preliminary allocation of the purchase price to the assets and liabilities of Insignia is comprised of the following:
(in thousands) | |||
Assets: |
|||
Current assets |
$ | 247,833 | |
Property and equipment |
36,406 | ||
Other intangible assets |
102,674 | ||
Other assets |
9,629 | ||
Deferred tax assets, net |
40,148 | ||
Total assets |
$ | 436,690 | |
Liabilities: |
|||
Current liabilities |
$ | 116,084 | |
Liabilities incurred in connection with the Insignia acquisition |
75,420 | ||
Notes payable |
43,000 | ||
All other liabilities |
46,048 | ||
Total liabilities |
280,552 | ||
Estimated fair value of net assets acquired |
$ | 156,138 | |
(g) | The adjustments to goodwill are comprised of the following: |
(in thousands) |
||||
Insignia historical goodwill |
$ | (260,565 | ) | |
Less: Excess purchase price over estimated fair value of net assets acquired |
177,232 | |||
Net pro forma adjustments to goodwill |
$ | (83,333 | ) | |
(h) | The adjustments to other intangible assets are comprised of the following: |
(in thousands) |
||||
Fair value of Insignias net revenue backlog as of June 30, 2003 |
$ | 50,000 | ||
Fair value of definite life intangible assets |
27,674 | |||
Fair value of Richard Ellis trade name in the United Kingdom |
25,000 | |||
Write-off of the historical book value of Insignias intangible assets |
(4,684 | ) | ||
Net pro forma adjustments to other intangible assets |
$ | 97,990 | ||
Fair value of Insignias net revenue backlog as of June 30, 2003 represents the estimated backlog of Insignias revenue producing transactions acquired by us in the Insignia acquisition. The backlog consists of commissions receivable on Insignias revenue producing transactions, which were at various stages of completion prior to the Insignia acquisition. Purchase accounting rules under generally accepted accounting principles in the United States require these commissions to be recorded as an intangible asset purchased. This asset will be amortized as cash is received upon final closing of these pending transactions.
Definite life intangible assets are primarily comprised of property management contracts in the United States, the United Kingdom, France and other European operations, which will be amortized over their estimated useful lives of up to seven years. The Richard Ellis trade name in the United Kingdom, which was owned by Insignia prior to the Insignia acquisition, is assumed to have an indefinite life and accordingly will not be amortized. The trade name will be subject to at least an annual review for impairment.
(i) | Represents the net adjustment to reflect the tax effect of the pro forma adjustments at applicable statutory rates. Deferred taxes are subject to the final appraisal and purchase price allocation to assets and liabilities other than goodwill. The adjustment also includes the reclassification of $22.6 million of Insignias deferred tax liabilities as a reduction to deferred tax assets to conform to our presentation. |
38
(j) | The adjustments to other assets are comprised of the following: |
(in thousands) |
||||
Financing costs associated with debt issued in connection with the pro forma transactions |
$ | 19,347 | ||
Fair value of Insignias below market leases |
1,602 | |||
Write-off of deferred financing costs of our prior credit facility |
(6,982 | ) | ||
Write-off of deferred financing costs of Insignias debt to be repaid |
(1,616 | ) | ||
Other |
(4,484 | ) | ||
Net pro forma adjustments to other assets |
$ | 7,867 | ||
Financing costs represent our estimate of transaction fees and costs directly attributable to the debt financings related to the pro forma transactions. Costs will be allocated to each debt instrument based on specific identification or as a percentage of face value, as appropriate. Such costs will be amortized over the term of the appropriate debt instrument.
(k) | The adjustments to accounts payable and accrued expenses are comprised of the following: |
(in thousands) |
||||
Write-off of Insignias existing net deferred revenue |
$ | (5,199 | ) | |
Accrued severance and other contractual obligations |
17,252 | |||
Accrued facilities closure costs |
8,200 | |||
Accrued transaction costs |
2,368 | |||
Net pro forma adjustment to accounts payable and accrued expenses |
$ | 22,621 | ||
We have recorded as a component of the Insignia purchase price the estimated costs associated with an involuntary plan of termination of certain of Insignias employees. This plan was implemented concurrently with the closing of the Insignia acquisition. We have also recorded as a component of the Insignia purchase price the estimated cost to exit duplicate facilities of Insignia. These accruals have been recorded in accordance with EITF 95-3.
(l) | Reflects the incurrence and repayment of debt as follows: |
(in thousands) |
||||
Non-current portion: |
||||
Additional tranche B term loan borrowings |
$ | 74,250 | ||
Repayment of Insignias revolving credit facility |
(28,000 | ) | ||
Repayment of Insignias subordinated credit facility |
(15,000 | ) | ||
Adjustment to non-current portion of long-term debt |
$ | 31,250 | ||
Current portion: |
||||
Current portion of additional tranche B term loan borrowings |
$ | 750 | ||
Adjustment to current portion of long-term debt |
$ | 750 | ||
In connection with the Insignia acquisition, we entered into an amended and restated credit agreement with Credit Suisse First Boston, or CSFB, and other lenders. Our previous credit facility was, and the amended and restated credit agreement entered into in connection with the Insignia acquisition continued to be, jointly and severally guaranteed by CBRE Holding and its wholly owned domestic subsidiaries and secured by substantially all of their assets. The amended and restated credit agreement included a tranche A term facility of $50.0 million, which was fully drawn in connection with the acquisition of CB Richard Ellis Services, Inc. by CBRE Holding in 2001, 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 acquisition and $75.0 million of
39
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 in connection with the Insignia acquisition, borrowings under the tranche A and revolving facility bore interest at varying rates based, at our option, on 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 were defined in the amended and restated credit agreement. Pursuant to the amended and restated credit agreement entered into in connection with the Insignia acquisition, borrowings under the tranche B facility bore interest at varying rates based, at our option, on either the applicable LIBOR plus 4.25% or the alternate base rate plus 3.25%. The alternate base rate was the higher of (1) CSFBs prime rate or (2) the Federal Funds Effective Rate plus one-half of one percent.
On October 14, 2003, we refinanced all of the outstanding loans under the amended and restated credit agreement described above. As part of this refinancing, we entered into a new amended and restated credit agreement, pursuant to which, among other things, the interest rates, amortization schedule and maturity date for our term loans were amended. For additional information regarding the terms of the new amended and restated credit agreement, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources and Description of Other IndebtednessOur Senior Secured Credit Facilities.
(m) | The adjustments to other long-term liabilities are comprised of the following: |
(in thousands) |
||||
Accrued facilities closure costs |
$ | 20,900 | ||
Accrued severance and other contractual obligations |
5,900 | |||
Fair value adjustment for Insignias above market leases |
2,525 | |||
Write-off of Insignias existing net deferred rent expense |
(2,469 | ) | ||
Net pro forma adjustment to other long term liabilities |
$ | 26,856 | ||
(n) | Represents the elimination of Insignias historical equity (after adjustments for dispositions) and the issuance of 852,865 shares of Class A common stock, $0.01 par value per share, of CBRE Holding and 6,647,135 shares of Class B common stock, $0.01 par value per share, of CBRE Holding to certain stockholders of CBRE Holding as follows: |
(in thousands) |
||||
Elimination of Insignias equity: |
||||
Insignias historical preferred stock |
$ | (4 | ) | |
Insignias historical common stock |
(241 | ) | ||
Insignias additional paid-in capital |
(443,101 | ) | ||
Repayment of notes receivable from sale of stock |
1,006 | |||
Insignias accumulated deficit |
49,152 | |||
Insignias accumulated other comprehensive income |
(2,259 | ) | ||
Pro forma adjustments to Insignias historical equity |
$ | (395,447 | ) | |
Adjustments to CBRE Holdings equity: |
||||
Issuance of Class A common stock |
$ | 9 | ||
Issuance of Class B common stock |
66 | |||
Additional paid-in capital |
119,925 | |||
Accumulated earnings (write off of deferred financing costs of prior credit facility) |
(6,982 | ) | ||
Pro forma adjustments to CBRE Holdings equity |
$ | 113,018 | ||
Net pro forma adjustments to equity |
$ | (282,429 | ) | |
40
The net decrease in additional paid-in capital of $323.2 million is comprised of the elimination of Insignias additional paid-in capital of $443.1 million, offset by the increase in additional paid-in capital of $119.9 million associated with the equity issued to stockholders of CBRE Holding. Certain stockholders of CBRE Holding provided $120.0 million in equity to fund a portion of the Insignia acquisition through the purchase of 852,865 shares of Class A common stock, $0.01 par value per share, of CBRE Holding and 6,647,135 shares of Class B common stock, $0.01 par value per share, of CBRE Holding, in each case at $16.00 per share in cash.
41
CBRE HOLDING, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31, 2002
(in thousands, except share data)
Historical |
Pro Forma Adjustments |
Pro Forma Combined |
||||||||||||||||||
CBRE Holding |
Insignia |
Disposition of Real |
Insignia Acquisition |
|||||||||||||||||
Revenue |
$ | 1,170,277 | $ | 587,532 | $ | (13,647 | ) | $ | | $ | 1,744,162 | |||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
554,942 | | | | 554,942 | |||||||||||||||
Operating, administrative and other |
493,949 | | | | 493,949 | |||||||||||||||
Costs and expensesInsignia |
| 547,684 | (16,268 | ) | 222 | (b) | 531,638 | |||||||||||||
Depreciation and amortization |
24,614 | 20,241 | (1,993 | ) | 317 | (c) | 43,179 | |||||||||||||
Equity income from unconsolidated subsidiaries |
(9,326 | ) | (3,482 | ) | 3,482 | | (9,326 | ) | ||||||||||||
Merger-related charges |
36 | | | | 36 | |||||||||||||||
1,064,215 | 564,443 | (14,779 | ) | 539 | 1,614,418 | |||||||||||||||
Operating income |
106,062 | 23,089 | 1,132 | (539 | ) | 129,744 | ||||||||||||||
Interest income |
3,272 | 3,936 | (29 | ) | | 7,179 | ||||||||||||||
Interest expense |
60,501 | 10,976 | (2,122 | ) | 20,983 | (d) | 90,338 | |||||||||||||
Income from continuing operations before provision for income tax |
48,833 | 16,049 | 3,225 | (21,522 | ) | 46,585 | ||||||||||||||
Provision for income taxes |
30,106 | 7,012 | 1,604 | (8,609 | )(e) | 30,113 | ||||||||||||||
Income from continuing operations |
$ | 18,727 | $ | 9,037 | $ | 1,621 | $ | (12,913 | ) | $ | 16,472 | |||||||||
Basic earnings per share from continuing operations |
$ | 1.25 | $ | 0.73 | ||||||||||||||||
Weighted average shares outstanding for basic earnings per share |
15,025,308 | 22,525,308 | (f) | |||||||||||||||||
Diluted earnings per share from continuing operations |
$ | 1.23 | $ | 0.72 | ||||||||||||||||
Weighted average shares outstanding for diluted earnings per share |
15,222,111 | 22,722,111 | (f) | |||||||||||||||||
The accompanying notes are an integral part of these financial statements.
42
Notes to Unaudited Pro Forma Combined Statements of Operations
for the Twelve Months Ended December 31, 2002
(a) | Reflects the elimination of the historical results of the real estate investment assets, which were sold by Insignia to Island Fund I, LLC immediately prior to the closing of the Insignia acquisition. For purposes of the unaudited pro forma combined statement of operations, these dispositions were assumed to have occurred on January 1, 2002. |
(b) | This adjustment represents incremental pro forma deferred rent expense resulting from the recalculation of deferred rent expense from the assumed Insignia acquisition closing date of January 1, 2002. |
(c) | This increase is comprised of pro forma amortization expense related to Insignias property management contracts established in purchase accounting over their estimated useful lives of up to seven years, partially offset by the reversal of Insignias historical amortization expense. In addition, depreciation expense was adjusted as a result of fair value adjustments to property and equipment. |
(d) | The increase in pro forma interest expense as a result of the pro forma transactions is summarized as follows: |
(in thousands) |
||||
Interest on $200.0 million in aggregate principal amount senior notes at 9¾% per annum |
$ | 19,500 | ||
Interest on $75.0 million in additional tranche B term loan borrowings at LIBOR plus 4.25% (1) |
4,573 | |||
Additional 0.50% interest rate margin on existing senior secured term loan facilities |
1,249 | |||
Incremental revolving credit facility loans at LIBOR plus 3.75% (1) (2) |
1,092 | |||
Amortization of deferred financing costs over the term of each respective debt instrument |
2,995 | |||
Incremental commitment and administration fees |
231 | |||
Subtotal |
29,640 | |||
Less: historical interest expense of Insignia |
(5,760 | ) | ||
Less: historical amortization of deferred financing costs of CBRE Holding (prior credit facility) |
(1,711 | ) | ||
Less: historical amortization of deferred financing costs of Insignia |
(1,186 | ) | ||
Subtotal |
(8,657 | ) | ||
Net increase in interest expense |
$ | 20,983 | ||
(1) | For purposes of the calculations above, LIBOR is based on the average three month LIBOR rate for fiscal year 2002. |
(2) | The incremental revolving credit facility loans reflect the difference between Insignias outstanding revolving credit facility balance as of December 31, 2002 of $95.0 million and the amounts outstanding in excess of $95.0 million during 2002. Such excess was assumed to be financed at LIBOR plus 3.75% under the amended and restated credit agreement we entered into in connection with the closing of the Insignia acquisition. |
(e) | Represents the tax effect of the pro forma adjustments included in notes (a) through (d) above at the respective statutory rates, excluding some items that are permanently non-deductible for tax purposes. |
(f) | Reflects the pro forma number of weighted average shares giving effect to the 852,865 shares of Class A common stock of CBRE Holding and 6,647,135 shares of Class B common stock of CBRE Holding issued in connection with the Insignia acquisition. |
43
CBRE HOLDING, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2003
(in thousands, except share data)
Historical |
Pro Forma Adjustments |
Pro Forma |
||||||||||||||||||
CBRE Holding |
Insignia |
Disposition of Real Estate Investment Assets (a) |
Insignia Acquisition |
|||||||||||||||||
Revenue |
$ | 585,441 | $ | 285,606 | $ | (5,481 | ) | $ | | $ | 865,566 | |||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
276,665 | | | | 276,665 | |||||||||||||||
Operating, administrative and other |
263,596 | | | | 263,596 | |||||||||||||||
Costs and expensesInsignia |
| 280,850 | (7,631 | ) | 122 | (b) | 273,341 | |||||||||||||
Depreciation and amortization |
12,500 | 8,946 | (788 | ) | 1,022 | (c) | 21,680 | |||||||||||||
Equity (income) loss from unconsolidated subsidiaries |
(6,864 | ) | 3,318 | (3,318 | ) | | (6,864 | ) | ||||||||||||
Merger-related charges |
3,310 | 4,885 | | (4,885 | )(d) | 3,310 | ||||||||||||||
549,207 | 297,999 | (11,737 | ) | (3,741 | ) | 831,728 | ||||||||||||||
Operating income (loss) |
36,234 | (12,393 | ) | 6,256 | 3,741 | 33,838 | ||||||||||||||
Interest income |
1,776 | 1,646 | | (260 | )(e) | 3,162 | ||||||||||||||
Interest expense |
31,264 | 4,134 | (841 | ) | 8,531 | (f) | 43,088 | |||||||||||||
Income (loss) from continuing operations before provision (benefit) for income tax |
6,746 | (14,881 | ) | 7,097 | (5,050 | ) | (6,088 | ) | ||||||||||||
Provision (benefit) for income taxes |
2,921 | (5,208 | ) | 2,923 | (2,020 | )(g) | (1,384 | ) | ||||||||||||
Income (loss) from continuing operations |
$ | 3,825 | $ | (9,673 | ) | $ | 4,174 | $ | (3,030 | ) | $ | (4,704 | ) | |||||||
Basic earnings (loss) per share from continuing operations |
$ | 0.25 | $ | (0.21 | ) | |||||||||||||||
Weighted average shares outstanding for basic earnings (loss) per share |
15,035,075 | 22,535,075 | ||||||||||||||||||
Diluted earnings (loss) per share from continuing operations |
$ | 0.25 | $ | (0.21 | ) | |||||||||||||||
Weighted average shares outstanding for diluted earnings (loss) per share |
15,321,994 | 22,535,075 | ||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
44
Notes to Unaudited Pro Forma Combined Statements of Operations
For the Six Months Ended June 30, 2003
(a) | Reflects the elimination of the historical results of the real estate investment assets, which were sold by Insignia to Island Fund I, LLC immediately prior to the closing of the Insignia acquisition. For purposes of the unaudited pro forma combined statement of operations, these dispositions were assumed to have occurred on January 1, 2002. |
(b) | This adjustment represents incremental pro forma deferred rent expense resulting from the recalculation of deferred rent expense from the assumed Insignia acquisition closing date of January 1, 2002. |
(c) | This increase is comprised of pro forma amortization expense related to Insignias property management contracts established in purchase accounting over their estimated useful lives of up to seven years, partially offset by the reversal of Insignias historical amortization expense. In addition, depreciation expense was adjusted as a result of fair value adjustments to property and equipment. |
(d) | Per Rule 11-02 of Regulation S-X, the pro forma combined statement of operations shall disclose income (loss) from continuing operations before nonrecurring charges or credits directly attributable to the transaction. Accordingly, this adjustment removes such charges for the pro forma combined statement of operations. Insignias historical merger costs represent professional fees incurred related to the Insignia acquisition. |
(e) | Represents the reversal of historical interest income earned by us on the net proceeds from the $200.0 million in aggregate principal amount 9 3/4% senior notes held in escrow from May 22, 2003 through July 23, 2003, the date of the closing of the Insignia acquisition. The net proceeds held in escrow were released to us upon consummation of the acquisition. |
(f) | The increase in pro forma interest expense as a result of the pro forma transactions is summarized as follows: |
(in thousands) |
||||
Interest on $200 million in aggregate principal amount 9 3/4% senior notes at 9 3/4% per annum |
$ | 9,750 | ||
Interest on $75.0 million in additional tranche B term loan borrowings at LIBOR plus 4.25% (1) |
2,100 | |||
Additional 0.50% interest rate margin on existing senior secured term loan facilities |
580 | |||
Amortization of deferred financing costs over the term of each respective debt instrument |
1,497 | |||
Incremental commitment and administration fees |
174 | |||
Subtotal |
14,101 | |||
Less: historical interest expense of CBRE Holding for $200.0 million in aggregate principal amount 9 3/4% senior notes |
(2,167 | ) | ||
Less: historical interest expense of Insignia |
(1,667 | ) | ||
Less: historical amortization of deferred financing costs of CBRE Holding (credit facility in effect prior to Insignia acquisition and 9 3/4% senior notes) |
(1,001 | ) | ||
Less: amortization of deferred financing costs of Insignia |
(735 | ) | ||
Subtotal |
(5,570 | ) | ||
Net increase in interest expense |
$ | 8,531 | ||
(1) | For purposes of the calculations above, LIBOR is based on the average three month LIBOR rate for the six months ended June 30, 2003. |
(g) | Represents the tax effect of the pro forma adjustments included in notes (a) through (f) above at the respective statutory rates, excluding some items that are permanently non-deductible for tax purposes. |
(h) | Reflects the pro forma number of weighted average shares giving effect to the 852,865 shares of Class A common stock of CBRE Holding and the 6,647,135 shares of Class B common stock of CBRE Holding issued in connection with the Insignia acquisition. |
45
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth CBRE Holdings selected historical consolidated financial information for each of the five years in the period ended December 31, 2002 and for the six-month periods ended June 30,2002 and June 30, 2003. The statement of operations data for the six-month periods ended June 30, 2002 and June 30, 2003 and the balance sheet data as of June 30, 2003 were derived from the unaudited consolidated financial statements of CBRE Holding included elsewhere in this prospectus. The statement of operations data for the twelve months ended December 31, 2002, the period from February 20, 2001 (inception) through December 31, 2001, the period from January 1, 2001 through July 20, 2001 and for the twelve months ended December 31, 2000 and the balance sheet data as of December 31, 2001 and 2002 were derived from CBRE Holdings or our predecessors audited consolidated financial statements included elsewhere in this prospectus. The statement of operations data for the twelve month periods ended December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998, 1999 and 2000 were derived from audited consolidated financial statements of our predecessor that are not included in this prospectus.
The selected financial data presented below are not necessarily indicative of results of future operations and should be read in conjunction with CBRE Holdings consolidated financial statements and the information included under the captions Managements Discussion and Analysis of Financial Condition and Results of Operations and Unaudited Pro Forma Financial Information included elsewhere in this prospectus.
Predecessor |
Predecessor |
Predecessor |
Company |
Company |
Company | |||||||||||||
CB Richard Ellis |
CB Richard Ellis |
CB Richard Ellis |
CBRE Holding, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. | |||||||||||||
December 31, 1998 |
December 31, 1999 |
December 31, 2000 |
December 31, 2001 |
December 31, 2002 |
June 30, 2003 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||
Cash and cash equivalents |
$ | 19,551 | $ | 27,844 | $ | 20,854 | $ | 57,450 | $ | 79,701 | $ | 23,018 | ||||||
Total assets |
$ | 856,892 | $ | 929,483 | $ | 963,105 | $ | 1,354,512 | $ | 1,324,876 | $ | 1,561,901 | ||||||
Long-term debt |
$ | 373,691 | $ | 357,872 | $ | 303,571 | $ | 522,063 | $ | 511,133 | $ | 707,732 | ||||||
Total liabilities |
$ | 660,175 | $ | 715,874 | $ | 724,018 | $ | 1,097,693 | $ | 1,067,920 | $ | 1,303,148 | ||||||
Total stockholders equity |
$ | 190,842 | $ | 209,737 | $ | 235,339 | $ | 252,523 | $ | 251,341 | $ | 252,672 | ||||||
Number of shares outstanding (1) |
20,636,134 | 20,435,692 | 20,605,023 | 14,380,414 | 14,307,893 | 14,339,762 |
Predecessor |
Predecessor |
Predecessor |
Predecessor |
Company |
Company |
Company |
Company | |||||||||||||||||||
CB Richard Ellis Services, Inc. |
CB Richard Ellis Services, Inc. |
CB Richard Ellis Services, Inc. |
CB Richard Ellis Services, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. | |||||||||||||||||||
Twelve Months 1998(2) |
Twelve Months Ended December 31, 1999 |
Twelve Months Ended December 31, 2000 |
Period From 2001 |
February 20, 2001 (inception) Through December 31, 2001 (3) |
Twelve Months Ended December 31, 2002 |
Six Months June 30, |
Six Months June 30, | |||||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||||
Revenue |
$ | 1,034,503 | $ | 1,213,039 | $ | 1,323,604 | $ | 607,934 | $ | 562,828 | $ | 1,170,277 | $ | 508,883 | $ | 585,441 | ||||||||||
Operating income (loss) |
$ | 78,476 | $ | 76,899 | $ | 107,285 | $ | (14,174 | ) | $ | 62,732 | $ | 106,062 | $ | 32,177 | $ | 36,234 | |||||||||
Interest expense, net |
$ | 27,993 | $ | 37,438 | $ | 39,146 | $ | 18,736 | $ | 27,290 | $ | 57,229 | $ | 29,523 | $ | 29,488 | ||||||||||
Net income (loss) |
$ | 24,557 | $ | 23,282 | $ | 33,388 | $ | (34,020 | ) | $ | 17,426 | $ | 18,727 | $ | 1,194 | $ | 3,825 | |||||||||
Basic EPS (4) |
$ | (0.38 | ) | $ | 1.11 | $ | 1.60 | $ | (1.60 | ) | $ | 2.22 | $ | 1.25 | $ | 0.08 | $ | 0.25 | ||||||||
Weighted average shares outstanding for basic EPS (1)(4) |
20,136,117 | 20,998,097 | 20,931,111 | 21,306,584 | 7,845,004 | 15,025,308 | 15,042,584 | 15,033,075 | ||||||||||||||||||
Diluted EPS (4) |
$ | (0.38 | ) | $ | 1.10 | $ | 1.58 | $ | (1.60 | ) | $ | 2.20 | $ | 1.23 | $ | 0.08 | $ | 0.25 | ||||||||
Weighted average shares outstanding for diluted EPS (1)(4) |
20,136,117 | 21,072,436 | 21,097,240 | 21,306,584 | 7,909,797 | 15,222,111 | 15,212,141 | 15,321,994 |
46
Predecessor |
Predecessor |
Predecessor |
Predecessor |
Company |
Company |
Company |
Company |
|||||||||||||||||||||||||
CB Richard Ellis Services, Inc. |
CB Richard Ellis Services, Inc. |
CB Richard Ellis Services, Inc. |
CB Richard Ellis Services, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. |
|||||||||||||||||||||||||
Twelve Months 1998(2) |
Twelve Months Ended December 31, 1999 |
Twelve Months Ended December 31, 2000 |
Period From 2001 |
February 20, 2001 (inception) Through December 31, 2001 (3) |
Twelve Months Ended December 31, 2002 |
Six Months June 30, |
Six Months June 30, |
|||||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Other Data: |
||||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 76,005 | $ | 70,340 | $ | 80,859 | $ | (120,230 | ) | $ | 91,334 | $ | 64,882 | $ | (40,132 | ) | $ | (74,555 | ) | |||||||||||||
Net cash (used in) provided by investing activities |
$ | (222,911 | ) | $ | (23,096 | ) | $ | (32,469 | ) | $ | (12,139 | ) | $ | (261,393 | ) | $ | (24,130 | ) | $ | (16,210 | ) | $ | 2,396 | |||||||||
Net cash provided by (used in) financing activities |
$ | 119,438 | $ | (37,721 | ) | $ | (53,523 | ) | $ | 126,230 | $ | 213,831 | $ | (17,838 | ) | $ | 17,910 | $ | 14,171 | |||||||||||||
EBITDA (5) |
$ | 110,661 | $ | 117,369 | $ | 150,484 | $ | 11,482 | $ | 74,930 | $ | 130,676 | $ | 43,880 | $ | 48,734 |
Note: CBRE Holding and its predecessor have not declared any cash dividends on common stock for the periods shown.
(1) | For the period from February 20, 2001 (inception) through December 31, 2001, the 7,845,004 and the 7,909,797 represent the weighted average shares outstanding for basic and diluted earnings per share, respectively. These balances take into consideration the lower number of shares outstanding prior to the acquisition of CB Richard Ellis Services by CBRE Holding in 2001. The 14,380,414 represents the outstanding number of shares at December 31, 2001. |
(2) | The results for the twelve months ended December 31, 1998 include the activities of REI, Ltd. from April 17, 1998 and CB Hillier Parker Limited from July 7, 1998. For the twelve months ended December 31, 1998, basic and diluted loss per share include a deemed dividend of $32.3 million on the repurchase of our preferred stock. |
(3) | The results for the period from February 20, 2001 through December 31, 2001 include the activities of CB Richard Ellis Services, Inc. from July 20, 2001, the date CB Richard Ellis Services was acquired by CBRE Holding. |
(4) | EPS represents earnings (loss) per share. See earnings per share information in note 16 to CBRE Holdings consolidated financial statements included elsewhere in this prospectus. |
(5) | EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization. We believe that the presentation of EBITDA will enhance an investors understanding of our operating performance. EBITDA is also a measure used by our senior management to evaluate the performance of our various lines of business and for other required or discretionary purposes, such as our use of EBITDA as a significant component when measuring performance under our employee incentive programs. Additionally, many of our and CBRE Holdings debt covenants are based upon a measure similar to EBITDA. EBITDA should not be considered as an alternative to (1) operating income determined in accordance with accounting principles generally accepted in the United States or (2) operating cash flow determined in accordance with accounting principles generally accepted in the United States. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies. |
EBITDA is calculated as follows:
Predecessor |
Predecessor |
Predecessor |
Predecessor |
Company |
Company |
Company |
Company | ||||||||||||||||||
CB Richard Ellis Services, Inc. |
CB Richard Ellis Services, Inc. |
CB Richard Ellis Services, Inc. |
CB Richard Ellis Services, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. |
CBRE Holding, Inc. | ||||||||||||||||||
Twelve Months Ended December 31, 1998 |
Twelve Months Ended December 31, 1999 |
Twelve Months Ended December 31, 2000 |
Period From January 1 to July 20, 2001 |
February 20, 2001 (inception) Through December 31, 2001 |
Twelve Months Ended December 31, 2002 |
Six Months Ended June 30, 2002 |
Six Months Ended June 30, 2003 | ||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||
Operating income (loss) |
$ | 78,476 | $ | 76,899 | $ | 107,285 | $ | (14,174 | ) | $ | 62,732 | $ | 106,062 | $ | 32,177 | $ | 36,234 | ||||||||
Add: |
|||||||||||||||||||||||||
Depreciation and amortization |
32,185 | 40,470 | 43,199 | 25,656 | 12,198 | 24,614 | 11,703 | 12,500 | |||||||||||||||||
EBITDA |
$ | 110,661 | $ | 117,369 | $ | 150,484 | $ | 11,482 | $ | 74,930 | $ | 130,676 | $ | 43,880 | $ | 48,734 | |||||||||
47
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the risks described in Risk Factors and elsewhere in this prospectus. You should read the following discussion in conjunction with the information included under the captions Unaudited Pro Forma Financial Information and Selected Historical Financial Data and the financial statements and related notes included elsewhere in this prospectus.
Overview
We are one of the worlds largest global commercial real estate services firms in terms of revenue, offering a full range of services to commercial real estate occupiers, owners, lenders and investors. In 2002, on a pro forma basis after giving effect to the Insignia acquisition, we and Insignia provided commercial real estate services through a combined total of 250 offices in 47 countries. We have worldwide capabilities to assist buyers in the purchase and sellers in the disposition of commercial property, to assist tenants in finding available space and owners in finding qualified tenants, to provide valuation and appraisals for real estate property, to assist in the placement of financing for commercial real estate, to provide commercial loan servicing, to provide research and consulting services, to help institutional investors manage commercial real estate portfolios, to provide property and facilities management services and to serve as the outsource service provider to corporations seeking to be relieved of the responsibility for managing their real estate operations.
A significant portion of our revenue is seasonal. Historically, this seasonality has caused the revenue, operating income, net income and cash flow from operating activities to be lower in the first two quarters and higher in the third and fourth quarters of each year. The concentration of earnings and cash flow in the fourth quarter is due to an industry-wide focus on completing transactions toward the fiscal year-end, while incurring constant, non-variable expenses throughout the year. In addition, our operations are directly affected by actual and perceived trends in various national and economic conditions, including interest rates, the availability of credit to finance commercial real estate transactions and the impact of tax laws. Our international operations are subject to political instability, currency fluctuations and changing regulatory environments. To date, we do not believe that general inflation has had a material impact upon our operations. Revenue, commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand rather than general inflation.
In connection with the Insignia acquisition and the related transactions, we have undergone a substantial review of our and Insignias combined operations in order to identify areas of overlap. During 2002, we and Insignia incurred costs related to (1) the compensation of senior executive management personnel of Insignia who did not join CBRE Holding after the Insignia acquisition, (2) administrative and support costs associated with those executives, (3) field support activities, including human resources, legal, accounting and other administrative functions, of Insignia that overlap with ours and (4) similar field support activities of ours that we expect to eliminate. We expect to eliminate these costs as part of a detailed integration plan developed in connection with the Insignia acquisition. However, we cannot assure you as to when or if all of these expected cost savings will be realized. As we continue to implement our integration plan, a portion of the costs that we expect to save may relate to the elimination of certain of our own personnel. See Risk FactorsRisks Relating to Our BusinessWe cannot assure you as to when or if we will be able to achieve all of our expected cost savings in connection with the Insignia acquisition.
Basis of Presentation
On July 20, 2001, CBRE Holding acquired CB Richard Ellis Services, Inc., pursuant to an Amended and Restated Agreement and Plan of Merger dated May 31, 2001 among CBRE Holding, CB Richard Ellis Services
48
and Blum CB Corp., a wholly owned subsidiary of CBRE Holding. Blum CB was merged with and into CB Richard Ellis Services, with CB Richard Ellis Services being the surviving corporation. At the effective time of such merger, CB Richard Ellis Services became a wholly owned subsidiary of CBRE Holding. For purposes of this section of the prospectus, we refer to the merger of Blum CB into CB Richard Ellis Services as the 2001 merger, the merger agreement related thereto, as amended, as the 2001 merger agreement and CB Richard Ellis Services prior to the 2001 merger as our predecessor.
CBRE Holdings results of operations, including its segment operations and cash flows, for the year ended December 31, 2001 have been derived by combining the results of operations and cash flows of CBRE Holding for the period from February 20, 2001 (inception) to December 31, 2001 with the results of operations and cash flows of our predecessor, prior to the 2001 merger, from January 1, 2001 through July 20, 2001, the date of the 2001 merger. The results of operations and cash flows of our predecessor prior to the 2001 merger incorporated in the following discussion are the historical results and cash flows of our predecessor. These results of our predecessor do not reflect any purchase accounting adjustments, which are included in the results of CBRE Holding subsequent to the 2001 merger. Due to the effects of purchase accounting applied as a result of the 2001 merger and the additional interest expense associated with the debt incurred to finance the 2001 merger, the results of operations of CBRE Holding may not be comparable in all respects to the results of operations for our predecessor prior to the 2001 merger. However, CBRE Holdings management believes a discussion of the 2001 operations is more meaningful by combining the results of CBRE Holding with the results of our predecessor.
Results of Operations
The following tables set forth items derived from the consolidated statements of operations for the six months ended June 30, 2002 and 2003 and for the years ended December 31, 2000, 2001 and 2002, presented in dollars and as a percentage of revenue:
Six Months Ended June 30, |
||||||||||||||
2002 |
2003 |
|||||||||||||
(Dollars in thousands) | ||||||||||||||
Revenue |
$ | 508,883 | 100.0 | % | $ | 585,441 | 100.0 | % | ||||||
Costs and expenses |
||||||||||||||
Cost of services |
227,836 | 44.8 | 276,665 | 47.3 | ||||||||||
Operating, administrative and other |
240,206 | 47.2 | 263,596 | 45.0 | ||||||||||
Depreciation and amortization |
11,703 | 2.3 | 12,500 | 2.1 | ||||||||||
Equity income from unconsolidated subsidiaries |
(3,644 | ) | (0.7 | ) | (6,864 | ) | (1.2 | ) | ||||||
Merger-related charges |
605 | 0.1 | 3,310 | 0.6 | ||||||||||
Operating income |
32,177 | 6.3 | 36,234 | 6.2 | ||||||||||
Interest income |
1,398 | 0.3 | 1,776 | 0.3 | ||||||||||
Interest expense |
30,921 | 6.1 | 31,264 | 5.3 | ||||||||||
Income before provision for income taxes |
2,654 | 0.5 | 6,746 | 1.2 | ||||||||||
Provision for income taxes |
1,460 | 0.3 | 2,921 | 0.5 | ||||||||||
Net income |
$ | 1,194 | 0.2 | % | $ | 3,825 | 0.7 | % | ||||||
EBITDA |
$ | 43,880 | 8.6 | % | $ | 48,734 | 8.3 | % | ||||||
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Year Ended December 31, |
|||||||||||||||||||||
2000 |
2001 |
2002 |
|||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||
Revenue |
$ | 1,323,604 | 100.0 | % | $ | 1,170,762 | 100.0 | % | $ | 1,170,277 | 100.0 | % | |||||||||
Costs and expenses: |
|||||||||||||||||||||
Cost of services |
628,097 | 47.4 | 547,577 | 46.8 | 554,942 | 47.4 | |||||||||||||||
Operating, administrative and other |
551,528 | 41.7 | 512,632 | 43.8 | 493,949 | 42.2 | |||||||||||||||
Depreciation and amortization |
43,199 | 3.3 | 37,854 | 3.2 | 24,614 | 2.1 | |||||||||||||||
Equity income from unconsolidated subsidiaries |
(6,505 | ) | (0.5 | ) | (4,428 | ) | (0.4 | ) | (9,326 | ) | (0.8 | ) | |||||||||
Merger-related and other nonrecurring charges |
| | 28,569 | 2.5 | 36 | | |||||||||||||||
Operating income |
107,285 | 8.1 | 48,558 | 4.1 | 106,062 | 9.1 | |||||||||||||||
Interest income |
2,554 | 0.2 | 3,994 | 0.4 | 3,272 | 0.3 | |||||||||||||||
Interest expense |
41,700 | 3.2 | 50,020 | 4.3 | 60,501 | 5.2 | |||||||||||||||
Income before provision for income taxes |
68,139 | 5.1 | 2,532 | 0.2 | 48,833 | 4.2 | |||||||||||||||
Provision for income taxes |
34,751 | 2.6 | 19,126 | 1.6 | 30,106 | 2.6 | |||||||||||||||
Net income (loss) |
$ | 33,388 | 2.5 | % | $ | (16,594 | ) | (1.4 | )% | $ | 18,727 | 1.6 | % | ||||||||
EBITDA |
$ | 150,484 | 11.4 | % | $ | 86,412 | 7.4 | % | $ | 130,676 | 11.2 | % | |||||||||
EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization. We believe that the presentation of EBITDA will enhance an investors understanding of our operating performance. EBITDA is also a measure used by our senior management to evaluate the performance of our various lines of business and for other required or discretionary purposes, such as our use of EBITDA as a significant component when measuring performance under our employee incentive programs. Additionally, many of CBRE Holdings and our debt covenants are based upon a measurement similar to EBITDA. EBITDA should not be considered as an alternative to (1) operating income determined in accordance with accounting principles generally accepted in the United States or (2) operating cash flow determined in accordance with accounting principles generally accepted in the United States. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.
EBITDA is calculated as follows:
Six Months Ended June 30, | ||||||
2002 |
2003 | |||||
(Dollars in thousands) | ||||||
Operating income |
$ | 32,177 | $ | 36,234 | ||
Add: |
||||||
Depreciation and amortization |
11,703 | 12,500 | ||||
EBITDA |
$ | 43,880 | $ | 48,734 | ||
Year Ended December 31, | |||||||||
2000 |
2001 |
2002 | |||||||
(Dollars in thousands) | |||||||||
Operating income |
$ | 107,285 | $ | 48,558 | $ | 106,062 | |||
Add: |
|||||||||
Depreciation and amortization |
43,199 | 37,854 | 24,614 | ||||||
EBITDA |
$ | 150,484 | $ | 86,412 | $ | 130,676 | |||
50
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
CBRE Holding reported consolidated net income of $3.8 million for the six months ended June 30, 2003 on revenue of $585.4 million as compared to consolidated net income of $1.2 million on revenue of $508.9 million for the six months ended June 30, 2002.
Revenue on a consolidated basis increased $76.6 million or 15.0% during the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. The increase was driven by significantly higher worldwide sales transaction revenue as well as increased worldwide appraisal and consultation fees, and lease transaction revenue.
Cost of services on a consolidated basis totaled $276.7 million, an increase of $48.8 million or 21.4% from the six months ended June 30, 2002. This increase was mainly due to higher worldwide sales transaction commissions driven by increased worldwide sales transaction revenue as well as increased worldwide payroll related costs, primarily insurance. As a result of the latter, cost of services as a percentage of revenue increased from 44.8% for the six months ended June 30, 2002 to 47.3% for the six months ended June 30, 2003.
Operating, administrative and other expenses on a consolidated basis were $263.6 million, an increase of $23.4 million or 9.7% for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. The increase was primarily driven by higher worldwide bonus and payroll related expenses as well as increased consulting expenses in the Americas and Europe. These increases were partially offset by foreign currency transaction gains resulting from the weaker U.S. dollar. Included in the 2003 bonus amount was an accrual for a one-time performance award of approximately $5.0 million.
Depreciation and amortization expense on a consolidated basis increased by $0.8 million or 6.8% mainly due to an increase in amortization expense for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. This was mainly due to a one-time reduction of amortization expense recorded in the prior year, which arose from the adjustment of certain intangible assets to their estimated fair values as of their acquisition date as determined by independent third party appraisers.
Equity income from unconsolidated subsidiaries increased $3.2 million or 88.4% for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002 primarily due to a gain on sale of owned units in an investment fund.
Merger-related charges on a consolidated basis were $3.3 million and $0.6 million for the six months ended June 30, 2003 and 2002, respectively. The current year charges primarily consisted of consulting and severance costs attributable to the acquisition of Insignia. The prior year charges mainly represented costs for professional services related to the acquisition of CB Richard Ellis Services by CBRE Holding in 2001.
Consolidated interest expense for the six months ended June 30, 2003 was comparable to the six months ended June 30, 2002 at $31.3 million.
Provision for income tax on a consolidated basis was $2.9 million for the six months ended June 30, 2003 as compared to $1.5 million for the six months ended June 30, 2002. The effective tax rate decreased from 55.0% for the six months ended June 30, 2002 to 43.3% for the six months ended June 30, 2003. This decrease was primarily due to non-taxable gains associated with CB Richard Ellis Services deferred compensation plan in the current year versus the non-deductible losses experienced in the prior year.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
CBRE Holding reported consolidated net income of $18.7 million for the year ended December 31, 2002 on revenue of $1,170.3 million as compared to a consolidated net loss of $16.6 million on revenue of $1,170.8 million for the year ended December 31, 2001.
51
CBRE Holdings revenue on a consolidated basis for the year ended December 31, 2002 was comparable to the year ended December 31, 2001. Declines in lease transaction revenue, principally in the Americas and Asia Pacific, combined with a nonrecurring prior year sale of mortgage fund contracts of $5.6 million, was mostly offset by higher worldwide sales transaction revenue, consulting fees, investment management fees and loan fees.
CBRE Holdings cost of services on a consolidated basis totaled $554.9 million for the year ended December 31, 2002, an increase of $7.4 million or 1.3% from the year ended December 31, 2001. Cost of services as a percentage of revenue increased slightly to 47.4% for the year ended December 31, 2002 as compared to 46.8% for the year ended December 31, 2001. This increase was primarily due to higher producer compensation within CBRE Holdings international operations associated with expanded international activities. These increases were partially offset by lower variable commissions, principally in the Americas, driven by lower lease transaction revenue.
CBRE Holdings operating, administrative and other expenses on a consolidated basis were $493.9 million for the year ended December 31, 2002, a decrease of $18.7 million or 3.6% as compared to the year ended December 31, 2001. This decrease was primarily driven by cost cutting measures and operational efficiencies from programs initiated in May 2001, as well as foreign currency transaction and settlement gains resulting from the weaker U.S. dollar. These reductions were partially offset by an increase in bonuses and other incentives, primarily within our international operations, due to higher results.
CBRE Holdings depreciation and amortization expense on a consolidated basis decreased by $13.2 million or 35.0% mainly due to the discontinuation of goodwill amortization after the 2001 merger in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) and lower depreciation expense, principally due to lower capital expenditures for the year ended December 31, 2002. The year ended December 31, 2002 also included a one-time reduction of amortization expense of $2.0 million arising from the adjustment of certain intangible assets to their estimated fair values as of the acquisition date as determined by independent third party appraisers in 2002.
CBRE Holdings equity income from unconsolidated subsidiaries increased by $4.9 million or 110.6% for the year ended December 31, 2002 as compared to the prior year, primarily due to improved performance from several domestic joint ventures.
The year ended December 31, 2001 included merger-related and other nonrecurring charges on a consolidated basis of $28.6 million. These costs primarily consisted of merger-related costs of $18.3 million, the write-off of assets, primarily e-business investments, of $7.2 million as well as severance costs of $3.1 million related to our cost reduction program instituted in May 2001.
CBRE Holdings consolidated interest expense was $60.5 million, an increase of $10.5 million or 21.0% over the year ended December 31, 2001. This was primarily attributable to our change in debt structure as a result of the 2001 merger.
CBRE Holdings income tax expense on a consolidated basis was $30.1 million for the year ended December 31, 2002 as compared to $19.1 million for the year ended December 31, 2001. The income tax provision and effective tax rate were not comparable between periods due to effects of the 2001 merger and the adoption of SFAS No. 142, which resulted in the elimination of the amortization of goodwill. In addition, the decline in the market value of assets associated with the deferred compensation plan for which no tax benefit was realized contributed to an increased effective tax rate.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
CBRE Holding reported a consolidated net loss of $16.6 million for the year ended December 31, 2001 on revenue of $1,170.8 million compared to consolidated net income of $33.4 million on revenue of $1,323.6 million for the year ended December 31, 2000. The 2001 results include a nonrecurring sale of
52
mortgage fund management contracts of $5.6 million. The 2000 results include a nonrecurring sale of certain non-strategic assets of $4.7 million.
CBRE Holdings revenue on a consolidated basis decreased by $152.8 million or 11.5% during the year ended December 31, 2001 as compared to the year ended December 31, 2000. This was mainly driven by a $98.2 million decrease in lease transaction revenue and a $62.8 million decline in sales transaction revenue during 2001. The lower revenue was primarily attributable to our North American operation. However, our European and Asian operations also experienced lower sales and lease transaction revenue as compared to 2000. These decreases were slightly offset by a $6.4 million or 11.0% increase in loan origination and servicing fees as well as a $6.0 million or 8.1% increase in appraisal fees driven by increased refinancing activities due to a decline in interest rates in the United States and increased fees in the European operation.
CBRE Holdings cost of services on a consolidated basis totaled $547.6 million, a decrease of $80.5 million or 12.8% for the year ended December 31, 2001 as compared to the prior year. This decrease was primarily due to the lower sales and lease transaction revenue within North America. This decline in revenue also resulted in lower variable commissions expense within this region as compared to 2000. This was slightly offset by producer compensation within the international operations, which is typically fixed in nature and does not decrease as a result of lower revenue. Accordingly, cost of services as a percentage of revenue decreased slightly to 46.8% for 2001 as compared to 47.4% for 2000.
CBRE Holdings operating, administrative and other expenses on a consolidated basis were $512.6 million, a decrease of $38.9 million or 7.1% for the year ended December 31, 2001 as compared to the prior year. This decrease was due to cost cutting measures and operational efficiencies from programs initiated in May 2001. An organizational restructure was also implemented after the 2001 merger that included the reduction of administrative staff in corporate and divisional headquarters and the scaling back of unprofitable operations. In addition, bonus incentives and profit share declined due to our lower results.
CBRE Holdings depreciation and amortization expense on a consolidated basis decreased by $5.3 million or 12.4% primarily due to the discontinuation of goodwill amortization after the 2001 merger in accordance with SFAS No. 142.
CBRE Holdings equity income from unconsolidated subsidiaries decreased by $2.1 million or 31.9% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, primarily due to decreased results from several domestic joint ventures.
CBRE Holdings merger-related and other nonrecurring charges on a consolidated basis were $28.6 million for the year ended December 31, 2001. This included merger-related costs associated with the 2001 merger of $18.3 million, the write-off of assets, primarily e-business investments, of $7.2 million and severance costs of $3.1 million attributable to our cost reduction program instituted in May 2001.
CBRE Holdings consolidated interest expense was $50.0 million, an increase of $8.3 million or 20.0% for the year ended December 31, 2001 as compared to the year ended December 31, 2000. This was attributable to increased debt as a result of the 2001 merger.
CBRE Holdings provision for income taxes on a consolidated basis was $19.1 million for the year ended December 31, 2001 as compared to a provision for income taxes of $34.8 million for the year ended December 31, 2000. CBRE Holdings income tax provision and effective tax rate were not comparable between periods due to the 2001 merger. In addition, we adopted SFAS No. 142, which resulted in the elimination of the amortization of goodwill.
53
Segment Operations
In the third quarter of 2001, subsequent to our acquisition by CBRE Holding, we reorganized our business segments as part of our efforts to reduce costs and streamline our operations. We report our operations through three geographically organized segments: (1) Americas, (2) Europe, the Middle East and Africa, or EMEA, and (3) Asia Pacific. The Americas consists of operations located in the United States, Canada, Mexico and South America. EMEA mainly consists of operations in Europe, while Asia Pacific includes operations in Asia, Australia and New Zealand.
The following table summarizes our revenue, costs and expenses and operating income (loss) by operating segment for the six months ended June 30, 2002 and 2003 and the years ended December 31, 2000, 2001 and 2002. Our Americas results for the six months ended June 30, 2003 include merger-related charges of $1.7 million attributable to the acquisition of Insignia. Our Americas results for the six months ended June 30, 2002 include merger-related charges of $0.6 million, which represent costs for professional services related to the 2001 merger. Our Americas 2001 results include a nonrecurring sale of mortgage fund contracts of $5.6 million as well as costs related to the 2001 merger and other nonrecurring charges of $26.9 million. Our Americas 2000 results include a nonrecurring sale of certain non-strategic assets of $4.7 million. The EMEA results for the six months ended June 30, 2003 include merger-related charges of $1.6 million associated with our acquisition of Insignia. Our Asia Pacific 2001 results include costs related to the 2001 merger and other nonrecurring charges of $1.2 million.
Six Months Ended June 30, |
||||||||||||||
2002 |
2003 |
|||||||||||||
(Dollars in thousands) | ||||||||||||||
Americas |
||||||||||||||
Revenue |
$ | 394,521 | 100.0 | % | $ | 442,487 | 100.0 | % | ||||||
Costs and expenses: |
||||||||||||||
Cost of services |
181,254 | 45.9 | 215,929 | 48.8 | ||||||||||
Operating, administrative and other |
180,961 | 45.9 | 187,182 | 42.3 | ||||||||||
Depreciation and amortization |
8,207 | 2.1 | 9,191 | 2.1 | ||||||||||
Equity income from unconsolidated subsidiaries |
(3,106 | ) | (0.8 | ) | (6,843 | ) | (1.5 | ) | ||||||
Merger-related charges |
605 | 0.2 | 1,738 | 0.4 | ||||||||||
Operating income |
$ | 26,600 | 6.7 | % | $ | 35,290 | 8.0 | % | ||||||
EBITDA |
$ | 34,807 | 8.8 | % | $ | 44,481 | 10.1 | % | ||||||
EMEA |
||||||||||||||
Revenue |
$ | 73,371 | 100.0 | % | $ | 97,630 | 100.0 | % | ||||||
Costs and expenses: |
||||||||||||||
Cost of services |
29,281 | 7.4 | 40,381 | 9.1 | ||||||||||
Operating, administrative and other |
40,176 | 10.2 | 53,149 | 12.0 | ||||||||||
Depreciation and amortization |
1,974 | 0.5 | 1,821 | 0.4 | ||||||||||
Equity (income) loss from unconsolidated subsidiaries |
(10 | ) | | 108 | | |||||||||
Merger-related charges |
| | 1,572 | 0.4 | ||||||||||
Operating income |
$ | 1,950 | 2.7 | % | $ | 599 | 0.6 | % | ||||||
EBITDA |
$ | 3,924 | 5.3 | % | $ | 2,420 | 2.5 | % | ||||||
Asia Pacific |
||||||||||||||
Revenue |
$ | 40,991 | 100.0 | % | $ | 45,324 | 100.0 | % | ||||||
Costs and expenses: |
||||||||||||||
Cost of services |
17,301 | 42.2 | 20,355 | 44.9 | ||||||||||
Operating, administrative and other |
19,069 | 46.5 | 23,265 | 51.3 | ||||||||||
Depreciation and amortization |
1,522 | 3.7 | 1,488 | 3.3 | ||||||||||
Equity income from unconsolidated subsidiaries |
(528 | ) | (1.3 | ) | (129 | ) |