- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 001-12231
----------------
CB RICHARD ELLIS SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1616016
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 North Sepulveda Boulevard
El Segundo, California 90245-4380
(Address of principal executive offices) (Zip Code)
(310) 563-8600
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
The aggregate market value of the Registrant's common stock held by non-
affiliates of the Registrant on February 29, 2000 was $121,716,325.
Number of shares of common stock outstanding at February 29, 2000 was
20,434,442.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its May 16, 2000
Annual Meeting of Stockholders are incorporated by reference in Part III.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART I
Item 1. Business
Company Overview
Organization. CB Richard Ellis Services, Inc. ("CBRE Services") or (the
"Company") is a holding company that conducts its operations primarily through
approximately 75 direct and indirect operating subsidiaries. In the United
States ("US") the Company's principal operating subsidiaries are CB Richard
Ellis, Inc., L.J. Melody & Company ("L.J. Melody") and CB Richard Ellis
Investors, L.L.C. ("CBRE Investors"). Outside of the US the Company's
principal operating subsidiaries are CB Hillier Parker Limited ("HP") and
approximately 25 direct and indirect subsidiaries of CB Commercial Limited
(formerly known as REI Limited ("REI")) which operate in the United Kingdom
("UK") and CB Richard Ellis Limited which operates in Canada. The Company has
operating subsidiaries in approximately 25 additional countries and
cooperation agreements with independent firms in a number of additional
countries. Approximately 78 percent of the Company's revenues are from the US
and 22 percent from the rest of the world.
Nature of Operations. The Company provides a full range of real estate
services to commercial real estate tenants, owners and investors through
approximately 250 offices worldwide including but not limited to the US,
Argentina, Australia, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark,
France, Germany, Hong Kong, Hungary, India, Italy, the Netherlands, New
Zealand, People's Republic of China, Portugal, Singapore, Spain, Sweden,
Switzerland, Taiwan, Turkey and the UK. In July 1999, the Company undertook a
reorganization to streamline its US operations which resulted in a change in
its segment reporting from four to three segments. The Company's services
under this new segmentation include (i) brokerage services whereby the Company
facilitates the sale and lease of properties, transaction management and
advisory services, and investment property transactions, including
acquisitions and sales on behalf of investors ("Transaction Management");
(ii) capital market activities, including mortgage banking, brokerage and
servicing, investment management and advisory services, real estate market
research and valuation and appraisal services ("Financial Services"); and
(iii) facilities management services to corporate real estate users, and
property management and related services to owners ("Management Services").
The Company's diverse client base includes local, national and multinational
corporations, financial institutions, pension funds and other tax exempt
entities, local, state and national government entities, and individuals.
While the Company provides Transaction Management and Management Services in
most of its 250 offices, Financial Services are primarily provided in the US
and the UK (except appraisal which is offered by most offices).
A significant portion of the Company's revenue is seasonal. Historically,
this seasonality has caused the Company's revenue, operating income and net
income to be lower in the first two calendar quarters and higher in the third
and fourth calendar quarters of each year. In addition, the Company's
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. To date, the Company does not believe that general inflation has had a
material impact upon its operations. Revenues, commissions and other variable
costs related to revenues are primarily affected by real estate market supply
and demand rather than general inflation.
Recent Industry Trends
Over the last several years, the commercial real estate industry has
experienced a variety of changes, a number of which are structural in nature.
The most important of these changes are discussed below.
. Healthy Commercial Real Estate Markets.
Coincident with the longer term structural shifts in the commercial real
estate industry, commercial real estate markets in Australia, Europe and North
America over the last several years have experienced increased activity in
many product types and geographical market areas. This has been particularly
true for the US in
1
Arizona, California, Illinois, New England, New York, Texas and Washington
D.C./Baltimore where the Company has a significant market presence and for
Europe in France, the Netherlands, Spain and the UK. Office and industrial
building occupancy levels have generally been rising, rental rates have been
increasing and, correspondingly, property values have been rising. Capital in
these markets has been disciplined so that space supply and demand for space
has remained in equilibrium. In 1998 and the first three quarters of 1999 Asia
had declining revenues. This decline appears to have reversed in the fourth
quarter of 1999 as various Asian countries began to deal with their
significant economic problems. The Company believes that while those problems
are likely to continue into the year 2000 that in certain countries in Asia
potential for profit exists.
. Changing Composition and Needs of Investors in and Owners of Larger
Commercial Real Estate Assets.
Investors in and owners of larger commercial real estate assets have become
increasingly institutional (including pension funds, life insurance companies,
banks, property companies and in the US, publicly-held real estate investment
trusts ("REIT")). Simultaneously, their investment and management needs have
become increasingly multi-market due to the fact the commercial real estate
properties in their portfolios are typically located in numerous geographic
locations. With respect to institutions other than REITs, this change in the
ownership characteristics and management requirements of institutional real
estate investors and owners has fueled the demand for the growth of multi-
service, nationally or internationally-oriented real estate service providers.
As most REITs are internally managed and to date generally have outsourced
only their brokerage service needs, their demand for the Company's other real
estate services has been less than that of other institutional investors
although a select group of small and medium-sized REITs showed some interest
in 1999 in outsourcing property management services. The Company continues to
believe that the REITs are a potential growth area if Wall Street puts a
premium on growth in funds from operations which then causes REITs to elect to
outsource various property management functions which can be performed more
efficiently by broad-based management organizations like the Company. To date
the Company has seen no material revenue from REIT outsourcing of property
management due to expense containment although the Company currently manages
multiple assets for several REITs and frequently originates mortgages and is
engaged as exclusive leasing and sales agent for them.
. Continuing Corporate Outsourcing Trend.
Shareholder pressure for higher performance and return on equity within most
publicly held corporations around the globe has heightened corporate
management's awareness that corporate real estate assets are a major component
of corporate net worth. Simultaneously, with competitive pressures encouraging
greater focus on core businesses, companies have emphasized leaner staffing in
non-core activities and, as a result, outsourced certain non-core activities
to third parties. As a consequence, the demand for multi-discipline, multi-
market global professional real estate service firms that provide integrated
services capable of supplementing a corporate real estate department has
increased significantly. The Company's unique, wholly owned global network
provides access to Asian, European, North American and South American
companies interested in outsourcing and provides a global network of very high
quality services to companies throughout the world in the outsourcing process.
As a result of its 1998 acquisitions, the Company has the ability to deliver
commercial real estate and related services in every major world market. While
corporate outsourcing is only a modest revenue source for the Company at this
time the Company believes that the factors described above should accelerate
the outsourcing trend.
Acquisitions/Dispositions
The Company does not presently intend to pursue a substantive acquisition
strategy in 2000 but it will consider opportunistic acquisitions in its
mortgage banking, brokerage and property management businesses. During 1999
the Company acquired four companies, including a brokerage company in Sweden,
a brokerage company in Chile, a real estate consulting company in the US and a
mortgage brokerage company in the US. The aggregate purchase price for these
companies was approximately $13.8 million.
2
During 1999 the Company sold five of its smaller non-strategic offices
(Bakersfield and Fresno, California; Albuquerque, New Mexico; Reno, Nevada;
and Salt Lake City, Utah) for a total of approximately $7 million received in
cash and notes. It also sold an insurance operation which was used to help
property management and other clients with complex insurance problems for $3
million in receivables.
Because of the substantial non-cash goodwill and intangible amortization
charges incurred by the Company in connection with acquisitions subject to
purchase accounting and because of interest expense associated with cash
acquisition financing, management anticipates that past acquisitions have and
future acquisitions may adversely affect net income, especially in the first
several years following the acquisition. This problem is compounded when, as
in the case of the 1997 acquisition of Koll Real Estate Services ("Koll"), the
amortization of goodwill must be deducted for financial reporting purposes but
is not deductible for actual tax purposes with the result that the provision
for taxes for financial reporting purposes will for some period of time be 50-
55% when the actual cash tax rate is 40-45%. In addition, during the first six
months following an acquisition, the Company believes there are generally
significant one-time costs relating to integrating information technology,
accounting and management services and rationalizing personnel levels of the
combined operation (costs which the Company intends to take as a single charge
at the time of the acquisition to the maximum extent permissible). Management
does not intend to pursue acquisitions unless they are accretive to income
before interest expense and provision for amortization of goodwill and
intangibles and to operating cash flows (excluding the costs of integration).
The Company's Businesses
Transaction Management
Brokerage Services Including Investment Properties
The Company and its predecessors have provided commercial real estate
brokerage services since 1906 through the representation of buyers, sellers,
landlords and tenants in connection with the sale and lease of office space,
industrial buildings, retail properties, multi-family residential properties
and unimproved land. Transaction Management includes investment property
sales. Investment property sales are distinguished by the nature of the buyer
(an investor rather than a user), by the size of the transaction (generally
over $10 million) and by the team nature of the effort. On larger and more
complex investment property sales assignments, the Company's financial
consulting professionals provide sophisticated financial and analytical
resources to the client, the marketing team and the investor. These services
provide the client with in-depth analyses of transaction specific data as well
as real estate market data. Investment property sales in 1999 were essentially
flat due to slower than expected recovery from the 1998 capital markets
liquidity crisis, a continued slowdown in REIT acquisitions of property and
greater investor selectivity. In 1999, the Company generated revenues from its
Transaction Management services of approximately $881.7 million representing
approximately 32,159 completed transactions. In 1999, brokerage facilitated
over 8,071 sale transactions with an aggregate estimated total consideration
of approximately $28 billion and approximately 23,972 lease transactions
involving aggregate rents, under the terms of leases facilitated, of
approximately $19 billion.
Transaction Management comprise the largest source of revenue for the
Company and provides a foundation for growing the Company's other disciplines
which make up its multi-discipline integrated commercial real estate services.
The Company believes that its position in the brokerage services industry
provides a competitive advantage for all of its lines of business by enabling
them to leverage off brokerage's (i) international network of relationships
with owners and users of commercial real estate, (ii) real-time knowledge of
completed transactions and real estate market trends, and (iii) brand
recognition in the brokerage area.
Operations. At December 31, 1999 the Company employed approximately 1,800
brokerage professionals in Transaction Management in offices located in most
of the largest Metropolitan Statistical Areas ("MSAs") in the US and
approximately 920 brokerage professionals in the rest of the world. The
Company maintains a decentralized approach to Transaction Management other
than investment properties, bringing significant local knowledge and expertise
to each assignment. Each local office draws upon the broad range of support
services
3
provided by the Company's other business groups around the world, including an
international network of market research, client relationships and transaction
referrals which the Company believes provides it with significant economies of
scale over local, national and international competitors. While day-to-day
operations are decentralized, most accounting and financial functions are
centralized.
In order to increase market share in secondary markets in the US which are
not served by its wholly owned offices, the Company implemented a plan to
establish "partnerships" with leading local firms in these markets. Through
December 31, 1999, the Company had established such partnership-type
arrangements in Bakersfield and Fresno, California; Ft. Wayne and South Bend,
Indiana; Des Moines, Iowa; Louisville, Kentucky; East Lansing and Grand
Rapids, Michigan; Reno, Nevada; Albuquerque, New Mexico; Albany, Buffalo,
Rochester and Syracuse, New York; Toledo, Ohio; Charleston and Columbia, South
Carolina; Memphis, Tennessee; El Paso, Texas; Salt Lake City, Utah; and
Madison and Milwaukee, Wisconsin. A similar but less structured program exists
in Europe where the Company has "Co-operation Agreements" in Ireland, Israel,
Norway and Russia. In 1997, the Company contributed its brokerage and property
management business in the New England area to a partnership along with
Whittier Partners, a prominent New England real estate services firm. The
Company also contributed cash because the assets it contributed were less
valuable than the assets contributed by Whittier Partners. The Company and
Whittier Partners each own 50% of the partnership. In 1998, the Company
entered into a similar 50/50 joint venture in the Pittsburgh area which
resulted in the formation of CB Richard Ellis Pittsburgh, L.P. The Company
contributed $5.8 million to establish the Pittsburgh joint venture. In
December of 1999 the Company sold five of its offices--Bakersfield and Fresno,
California, Reno, Nevada, Albuquerque, New Mexico and Salt Lake City, Utah for
a total of $7 million to various employees of the Company. The rationale for
these sales was that while each of these locations is viable none of them are
strategic to the Company nor interdependent with its other offices. Each of
the sold offices joined the Company's Partners Program. The Company believes
that these secondary market offices will perform at higher levels when owned
by employees. The Company will evaluate the possibility of additional non-
strategic office sales after the results of these sales can be assessed.
Compensation. Under a typical brokerage services agreement, the Company is
entitled to receive sale or lease commissions. Sale commissions, which are
calculated as a percentage of sales price, are generally earned by the Company
at the close of escrow. Sale commissions in the US typically range from
approximately 1% to 6% with the rate of commission declining as the price of
the property increases. In the case of large investment properties (over $20
million) the commission is generally less than 1%. Outside of the US
commissions of 1% to 4% are typical. Lease commissions in the US are typically
calculated either as a percentage of the minimum rent payable during the term
of the lease or based upon the square footage of the leased premises, are
generally earned by the Company at the commencement of a lease and are not
contingent upon the tenant fulfilling the terms of the lease. In cases where a
third-party brokerage firm is not involved, lease commissions earned by the
Company for a new lease typically range between 2% and 6% of minimum rent
payable under the lease depending upon the value of the lease. Outside of the
US, the leasing commission is typically one month's rent or 10% of the first
year's rent. For renewal of an existing lease, such fees are generally 50% of
a new lease commission. In sales and leases where a third-party broker is
involved, the Company must typically share 50% of the commission it would have
otherwise received with the third-party broker. In the US, Canada and much of
Australia, the Company's brokerage sales professionals will receive 40% to 60%
of the Company's share of commissions before costs and expenses. In most other
parts of the world, the Company's brokerage professionals receive a salary and
a bonus, profit-share or small commission, which in the aggregate approximate
50% of the Company's share of commissions earned.
Corporate Services
The Company provides corporate services to major corporations around the
world. Corporate services include assisting corporations in developing and
executing integrated multiple-market real estate strategies. The Company's
objective is to establish long-term relationships with corporations that
require continuity in the delivery of high-quality, multi-market management
services and strategic consulting services including acquisition and
disposition services. Global competition, the focus on quality, "right-sizing"
of corporate
4
organizations and changes in management philosophy have all contributed to an
increased interest in and reliance on outside third-party real estate service
providers. Specifically, through contractual relationships, the Company
assists major, multi-market companies in developing and executing real estate
strategies as well as addressing specific occupancy objectives.
Operations. Corporate Services coordinates the utilization of all the
Company's various disciplines to deliver an integrated service to its clients
over broad geographies. Essentially, corporate services expands a client's
real estate department and supports most of the functions involved in a
corporate real estate department. Corporate Services includes research and
consulting, structured finance, facilities project management, lease
administration, occupancy planning and transaction management. These services
can be delivered as a bundled or unbundled basis in a single market or in
multiple markets around the globe. These services are generally provided on a
negotiated-fee basis.
Compensation. A typical corporate services agreement gives the Company the
right to execute some or all of the client's future sales and leasing
transactions and to receive other fees on a negotiated basis. The commission
rate with respect to such transactions frequently reflects a discount for the
captive nature and large volume of the business. The Company is developing
worldwide pricing to maximize integrated service delivery.
Term. A typical corporate services agreement includes a stated term of at
least one year and normally contains provisions for extension of the
agreement.
Financial Services
Mortgage Banking
The Company provides its mortgage origination and mortgage loan servicing
almost entirely in the US through L.J. Melody, which was acquired in July 1996
and is based in Houston, Texas. The Company originated approximately $6
billion of mortgages in 1999 with more than 100 institutional lenders. As part
of these origination activities, the Company has special conduit arrangements
with Commercial Mortgage-Backed Securities ("CMBS") issuers who are affiliates
of Bear Stearns, Citicorp, Deutsche Bank Securities, GE Capital, Heller
Financial, J.P. Morgan, Lehman Brothers, Merrill Lynch & Co., NationsBank, and
RFC Commercial which permit it to service the mortgage loans which it
originates. Under these arrangements, the Company generally originates
mortgages in its name, makes limited representations and warranties based upon
representations made to it by the borrower or another party and immediately
sells them into a conduit program without principal risk. The Company may
originate mortgages into other conduit programs where it does not have
servicing rights. The Company originates in its name (without principal risk)
and services loans for Federal Home Loan Mortgage Corp. (Freddie Mac) and
Federal National Mortgage Association (Fannie Mae). The Company is also a
major mortgage originator for insurance companies and pension funds having
originated mortgages in the names of insurance companies valued at
approximately $2.9 billion in 1999. The Company has correspondent arrangements
with various life insurance companies and pension funds which entitle it to
originate loans in their names and subsequently service the mortgage loans it
originates. At December 31, 1999, the Company serviced mortgage loan
portfolios of approximately $13 billion.
Operations. The Company employs approximately 100 mortgage banking
professionals and a support and asset management staff of 200 people located
in 30 offices in the US. The Company has no material mortgage banking
operations outside of the US. The Company's mortgage loan originations take
place throughout the US, with support from L.J. Melody's headquarters in
Houston, Texas. The Company's mortgage loan servicing primarily is handled by
L.J. Melody in Atlanta, Georgia; Minneapolis, Minnesota; Houston, Texas; and
Seattle, Washington.
Compensation. The Company typically receives origination fees, ranging from
0.5% for large insurance company and pension fund mortgage loans to 1.0% for
most conduit and agency mortgage loans. In addition, the Company can earn
special incentive fees from various conduit programs. In 1999, the Company
received approximately $0.9 million from such incentives. In situations where
the Company services the mortgage loans
5
which it originates, it also receives a servicing fee between .03% and .25%,
calculated as a percentage of the outstanding mortgage loan balance. These
correspondent agreements generally contain an evergreen provision with respect
to servicing which provides that the agreement remains in effect for an
indefinite period, but enables the lender to terminate the agreement upon 30
days prior written notice, which the Company believes to be a customary
industry termination provision. A majority of the Company's 1999 mortgage loan
origination revenue was from agreements which entitled it to both originate
and service mortgage loans. The Company also originates mortgage loans on
behalf of conduits and insurance companies for whom it does not perform
servicing. The Company's client relationships have historically been long
term. The Company pays its mortgage banking professionals a combination of
salary, commissions and incentive-based bonuses which typically average
approximately 50% of the Company's loan origination fees.
Investment Management
Through its wholly owned subsidiary, CBRE Investors (CB Hillier Parker
Investors in the UK), the Company sponsors real estate investment funds and
programs targeted primarily for institutional investors. At December 31, 1999,
assets under management were $8.4 billion representing an increase of 23.0%
over the prior year. During 1999, CBRE Investors raised over $2.0 billion of
equity from existing and new clients. CBRE Investors placed $1.6 billion in
new investments on behalf of clients and sold $761.0 million of property from
existing portfolios representing increases of 162.0% and 2.0% respectively
over 1998.
CBRE Investors has historically offered its investment management services
in two formats: combined funds and separate managed accounts tailored to
specific clients' needs. Separate accounts are typically non-discretionary and
as of 1999 represented about 85% of total assets under management.
Traditionally, the vast majority of investments were in unleveraged, low risk
return strategies targeted at US and UK pension funds.
With goals of increasing margins and assets under management, CBRE Investors
adopted a business plan in 1998, which contains four principal elements.
First, consistent with market demand, investment strategies have been
broadened to include more "value added" activities, which have higher total
return expectations. The higher return strategies are generally accompanied by
co-investment by the Company and a dedicated team of employees. The team and
the Company also share in the profits or "promote" from the venture.
Capitalizing on the CBRE Investors global platform, strategies have also been
expanded geographically with new investment programs created in Europe, Japan,
and Southeast Asia.
Second, CBRE Investors has shifted its primary new business focus from
separate accounts to funds and joint ventures. The latter structures give the
firm more control of assets, are more efficient to operate and generally have
higher fees.
The third element is to diversify CBRE Investors' clientele beyond pension
funds. Over 60% of the firms' new clients in 1999 were non-pension funds
including foundations, insurance companies, government investment funds, and
bank sponsored funds. Building on the Company's global platform, over 60% of
these new clients were located outside of the US.
The fourth element of the growth strategy is to capitalize on the growing
trend among institutional investors to outsource their real estate investment
management functions. During the last two years CBRE Investors has assumed the
investment management duties for portfolios totaling in excess of $1.5
billion.
Operations. Operationally, each investment strategy is executed by a
dedicated team with the requisite skill sets. At present time there are six
dedicated teams. In the US, they are Fiduciary Services (low risk/return
strategies), Strategic Partners, L.P. ("value added" fund), and Corporate
Partners, LLC (corporate real estate strategies). Internationally they are CB
Hillier Parker Investors (UK) (low risk/return strategies), CBRE Investors
Asia ("value added"), and CBRE Investors Europe which will not begin to
function until mid-2000. Each team's compensation is driven largely by the
investment performance of its particular strategy/team. This organizational
structure is designed to align the interests of team members with those of its
investor clients/partners, determine accountability, and make performance the
priority.
6
Dedicated teams share resources such as accounting, financial controls,
information technology, investor services and research. In addition to the
research within the CB Richard Ellis platform, which focuses primarily on
market conditions and forecasts, CBRE Investors has an in-house team of
research professionals that focuses on investment strategy and underwriting.
CBRE Investors has approximately 150 employees located in the Los Angeles
headquarters and in regional offices in Boston, Frankfurt, London, Singapore
and Tokyo.
Compensation. Investment management fees can have up to three components. In
chronological order, they are (i) acquisition fees, (ii) annual portfolio
management fees and (iii) incentive fees or profit sharing. Each fund or
account will have two or three of these components. Fees are typically higher
for sponsoring funds or joint ventures than managing separate accounts.
Acquisition and annual portfolio management fees usually range between .5-1.0%
of purchase price in the US and Asia. In the UK annual fees on separate
accounts are typically .05-.1% of asset value. Incentive fees usually range
between 10-20% of profit in excess of an agreed upon threshold return. With
respect to CBRE Investors' new funds in the US and all international
investments, the Company also derives fees for ancillary services such as
purchase and sale brokerage, mortgage origination, property management and
leasing brokerage.
Valuation and Appraisal Services
The Company's valuation and appraisal services business delivers
sophisticated commercial real estate valuations through a variety of products
including market value appraisals, portfolio valuation, discounted cash flow
analyses, litigation support, feasibility land use studies and fairness
opinions. At December 31, 1999, the Company's appraisal staff had more than
475 professionals with approximately 50% of the staff holding professional
designations. The business is operated internationally through 87 offices and
its clients are generally corporate and institutional portfolio owners and
lenders. In 1999, the Company performed more than 31,000 valuation and
appraisal assignments. Approximately 130 of the Company's appraisal
professionals were located in the US. During 1999, the Company developed an
internet-based system for coordinating and delivering appraisals. The Company
believes that this type of system is not currently in use by any competitor.
The system became operational in early 2000.
Real Estate Market Research
Real estate market research services are provided by nearly 200 researchers
worldwide in addition to 24 professionals in Boston, Massachusetts employed by
CB Richard Ellis/Torto Wheaton Research, by 14 professionals in San Francisco,
California employed by CB Richard Ellis/National Real Estate Index and by 27
professionals in London, England employed by CB Hillier Parker. Real estate
research services are provided to the Company's multiple lines of business as
well as sold to third-party clients and include (i) data collection and
interpretation, (ii) econometric forecasting, and (iii) portfolio risk
analysis for institutional clients within North American commercial real
estate markets and selected markets in Asia, Europe and South America. The
Company's publications and products provide real estate data for more than 60
of the largest MSAs in the US and are sold on a subscription basis to many of
the largest portfolio managers, insurance companies and pension funds. The
National Real Estate Index also compiles proprietary market research for 50
major urban areas nationwide, reporting benchmark market price and rent data
for office, light industrial, retail, and apartment properties, and tracking
the property portfolios of 150 of the largest REITs.
Management Services
Asset Services
The Company provides value-added asset and related services for income-
producing properties owned primarily by institutional investors and, at
December 31, 1999, managed approximately 227 million square feet of commercial
space in the US and 208 million square feet in the rest of the world.
7
Asset services include maintenance, marketing and leasing services for
investor-owned properties, including office, industrial, retail and multi-
family residential properties. Additionally, the Company provides construction
management services, which relate primarily to tenant improvements. The
Company works closely with its clients to implement their specific goals and
objectives, focusing on the enhancement of property values through
maximization of cash flow. The Company markets its services primarily to long-
term institutional owners of large commercial real estate assets. An asset
services agreement puts the Company in a position to provide other services
for the owner including refinancing, appraisal and lease and sales brokerage
services.
Operations. The Company employs approximately 1,195 individuals in its asset
services business in the US and an estimated 1,227 individuals in its asset
services business outside of the US. Most asset services are performed by
management teams located on-site or in the vicinity of the properties they
manage. This provides property owners and tenants with immediate and easily
accessible service, enhancing client awareness of manager accountability. All
personnel are trained and are encouraged to continue their education through
both Company-sponsored and outside training. The Company provides each local
office with centralized corporate resources including investments in computer
software and hardware. Asset services personnel generally utilize state-of-
the-art computer systems for accounting, marketing, and maintenance
management.
Compensation. Under a typical asset services agreement in the US, the
Company will be entitled to receive management fees and lease commissions.
Outside of the US, the management and leasing functions are generally
separate, although the Company may do both. The management fee in most cases
is based upon a formula which gives the Company either a certain amount per
square foot managed or a specified percentage of the monthly gross rental
income collected from tenants occupying the property under management. Where
rent is used as the basis for the fee, the fee will fluctuate as building
rents and occupancies increase and decrease. Some of these asset services
agreements also include a stated minimum management fee. The Company is
generally entitled to reimbursement for costs incurred that are directly
attributable to management of the property. Reimbursable costs, which are not
included in the Company's revenue, include the wages of on-site employees and,
in most cases, the cost of field office rent, furniture, computers, supplies
and utilities. The Company pays its asset services professionals a combination
of salary and incentive-based bonuses. In the US, lease commissions, which are
paid in addition to the management fee, are similar to those described for
brokerage services. In the US, employees who provide leasing services for
managed properties may be paid either commission or salary and incentive-based
bonuses. In the rest of the world, individuals providing leasing services
generally receive salary and incentive-based bonuses.
Term. A typical asset services agreement contains an evergreen provision
which provides that the agreement remains in effect for an indefinite period,
but enables the property owner to terminate the agreement upon 30 days prior
written notice, which the Company believes to be customary in the commercial
real estate industry.
Facilities Management
The Company's facilities management unit specializes in the administration,
management and maintenance of properties that are occupied by large
corporations and institutions, such as corporate headquarters, regional
offices, administrative offices and manufacturing and distribution facilities,
as well as tenant representation, capital asset disposition, strategic real
estate consulting and other ancillary services for corporate clients. At
December 31, 1999, the Company had approximately 122 million square feet under
facilities management. While most of the properties for which the Company
provides facilities management are located within the US, the Company is
providing such services in China, Italy, Norway, Sweden, and the UK for a
total of approximately 2 million square feet and expects its facilities
management business outside of the US to continue growing rapidly in 2000.
However, outside the US, the facilities management business which involves
significant up front infrastructure costs is not expected to be profitable
before 2001.
Operations. The Company's facilities management operations in the US are
organized into three geographic regions in the Eastern, Western and Central
areas, with each geographic region comprised of
8
consulting, corporate services and team management professionals who provide
corporate service clients with a broad array of financial, real estate,
technological and general business skills. Facilities management teams are
also in place in London and Singapore. In addition to providing a full range
of corporate services in a contractual relationship, the facilities management
group will respond to client requests generated by other Company business
groups for significant, single-assignment acquisition, disposition and
consulting assignments that may lead to long-term relationships.
Compensation. Under a typical facilities management agreement, the Company
is entitled to receive management fees and reimbursement for its costs (such
as costs of wages of on-site employees, capital expenditures, field office
rent, supplies and utilities) that are directly attributable to management of
the facility. Payments for reimbursed expenses are set against those expenses
and not included in revenue. Under certain facilities management agreements,
the Company may also be entitled to an additional incentive fee which is paid
if the Company meets certain performance criteria (such as a reduction in the
cost of operating the facility) established in advance between the client and
the Company.
Information Technology
The Company's goal in information technology is to provide worldwide
capability to input, access and manipulate data for internal accounting and
financial reporting, external or client accounting (primarily asset and
facilities management and investment advisory services) and as a presentation
and analytical business tool (including access to data and information by
clients). The Company has adopted a PC/server enterprise platform based upon
PeopleSoft and Vantif technology. The worldwide system is generally in place
with respect to e-mail and was in place with respect to internal and external
accounting by late 1999. As part of its information technology program the
Company has adopted mandatory computer hardware and software standards. The
Company's information technology group consists of approximately 161
employees, most of whom are located in the US. The Company has outsourced a
significant part of its information technology requirements.
The Internet
The Company is pursuing a three-part strategy involving the internet that
involves the development of investments in web-based applications in the
following categories: (i) web applications that make the Company's internet
processes more efficient; (ii) web applications that make the Company's client
relationship more productive and efficient; and (iii) select equity and/or
content investments in promising web-based commercial real estate entities.
The Company believes the internet will be a net gain for the Company,
eliminating some low value functions it currently earns fees for but at the
same time greatly enhancing its service offering to its clients and assisting
the Company in making its business more efficient. In addition, the cost of
developing internet-based applications should create additional barriers to
entry that will further differentiate the larger companies in the industry
from smaller companies with less available capital for investment.
Competition
The market for the Transaction Management 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. The Company believes that no more than two other major
firms have the ability to compete internationally with the Company's
brokerage, investment sales or corporate service businesses. Most of the
Company's competitors in brokerage (and, to a significant extent, asset
services) are local or regional firms that are substantially smaller than the
Company on an overall basis, but in some cases may be larger locally.
L.J. Melody competes (almost entirely in the US) with a large number of
mortgage banking firms and institutional lenders as well as regional and
national investment banking firms and insurance companies in
9
providing its mortgage banking services. Appraisal services are provided by
other international, national, local and regional appraisal firms and some
international, national and regional accounting firms. CBRE Investors and HP
investments have numerous competitors including other fund managers,
investment banks and banks.
The Company's management services business, located principally in the US
and the UK, compete for the right to manage properties controlled by third
parties. The competitor may be the owner of the property (who is trying to
decide the efficiency of outsourcing) or another management services company.
Increasing competition in recent years has resulted in having to provide
additional services at lower rates, thereby eroding margins.
In all of its business disciplines, the Company competes on the basis of the
skill and quality of its personnel, the variety of services offered, the
breadth of geographic coverage and the quality of its infrastructure,
including technology.
Employees
At December 31, 1999, the Company had approximately 9,853 employees located
in more than 33 countries. All of the Company's US and most of its
international sales professionals are parties to contracts with the Company
which subject them to the Company's rules and policies during their employment
and limit their post-employment activities in terms of soliciting clients or
employees of the Company. The Company believes that relations with its
employees are good.
Item 2. Properties
The Company sold its headquarters building in downtown Los Angeles,
California, in September 1999 and its small office building in Phoenix,
Arizona in October 1999, both at a minimal loss. The Los Angeles building was
previously written down by $9.0 million to its estimated fair market value and
reclassified as property held for sale which is included in other assets at
December 31, 1998 in the accompanying consolidated balance sheets.
The Company leases office space on terms that vary depending on the size and
location of the office. The leases expire at various dates through 2014. For
those leases that are not renewable, the Company believes there is adequate
alternative office space available at acceptable rental rates to meet its
needs, although rental rates in some markets may adversely affect the
Company's profits in those markets.
Item 3. Legal Proceedings
In December 1996, GMH Associates, Inc. ("GMH") filed a lawsuit against
Prudential Realty Group ("Prudential") and the Company in Superior Court of
Pennsylvania, Franklin County, alleging various contractual and tort claims
against Prudential, the seller of a large office complex, and the Company, its
agent in the sale, contending that Prudential breached its agreement to sell
the property to GMH, breached its duty to negotiate in good faith, conspired
with the Company to conceal from GMH that Prudential was negotiating to sell
the property to another purchaser and that Prudential and the Company
misrepresented that there were no other negotiations for the sale of the
property. Following a non-jury trial, the court rendered a decision in favor
of GMH and against Prudential and the Company, awarding GMH $20.3 million in
compensatory damages, against Prudential and the Company jointly and
severally, and $10.0 million in punitive damages, allocating the punitive
damage award $7.0 million as against Prudential and $3.0 million as against
the Company. Following the denial of motions by Prudential and the Company for
a new trial, a judgment was entered on December 3, 1998. Prudential and the
Company filed an appeal of the judgment. On March 3, 2000 the appellate court
in Pennsylvania reversed all of the trial courts' decisions finding that
liability was not supported on any theory claimed by GMH and directed that a
judgement be entered in favor of the defendants including the Company. The
plaintiff has filed an appeal with the Pennsylvania Supreme Court.
In August 1993, a former commissioned sales person of the Company filed a
lawsuit against the Company in the Superior Court of New Jersey, Bergen
County, alleging gender discrimination and wrongful termination
10
by the Company. On November 20, 1996, a jury returned a verdict against the
Company, awarding $1.5 million in general damages and $5.0 million in punitive
damages to the plaintiff. Subsequently, the trial court awarded the plaintiff
$638,000 in attorneys' fees and costs. Following denial by the trial court of
the Company's motions for new trial, reversal of the verdict and reduction of
damages, the Company filed an appeal of the verdict and requested a reduction
of damages. On March 9, 1999 the appellate court ruled in the Company's favor,
reversed the trial court decision and ordered a new trial. On February 16,
2000 the Supreme Court of New Jersey reversed the decision of the appellate
court, concluded that the general damage award in the trial court should be
sustained and returned the case to the appellate court for a determination as
to whether a new trial should be ordered on the issue of punitive damages.
Based on available reserves, cash and anticipated cash flows, the Company
believes that the ultimate outcome of this case will not have an impact on the
Company's ability to carry on its operations.
The Company is a party to a number of pending or threatened lawsuits arising
out of, or incident to, its ordinary course of business. Based on available
cash and anticipated cash flows, the Company believes that the ultimate
outcome will not have an impact on the Company's ability to carry on its
operations. Management believes that any liability to the Company that may
result from disposition of these lawsuits will not have a material effect on
the consolidated financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(1) The Company's common stock commenced trading on the New York Stock
Exchange ("NYSE") on November 7, 1997 under the symbol "CBG." From November
26, 1996 through November 6, 1997, the Company's common stock traded on the
Nasdaq Stock Market--National Market System ("NASDAQ--NMS") under the symbol
"CBCG." Prior to that period, there was no established public trading market
for the Company's common stock. The following table sets forth, for the
periods indicated, the high and low sales price per share of the common stock
on the NYSE.
Year Ended December 31, 1999 High Low
---------------------------- --------- ---------
First Quarter............................................ $19 13/16 $14 5/8
Second Quarter........................................... 24 7/8 14 7/16
Third Quarter............................................ 24 7/16 12 1/2
Fourth Quarter........................................... 14 13/16 10 11/16
Year Ended December 31, 1998
----------------------------
First Quarter............................................ $40 $27
Second Quarter........................................... 40 3/8 32
Third Quarter............................................ 35 13/16 19 1/4
Fourth Quarter........................................... 25 12 5/8
(2) At February 29, 2000, the Company had 925 record holders of its common
stock.
(3) In April 1999, the Company sold 140,833 shares of common stock to key
executives of the Company under the Company's 1999 Equity Incentive Plan. The
sale was made by private placement in reliance on the exemption from
registration provisions provided for in Section 4(2) of the Securities Act of
1933, as amended. A registration statement will be filed for the plan which
allows the shares to be sold freely once vested and paid for.
(4) Since its incorporation in March 1989 the Company has not declared any
cash dividends on its common stock. The Company's existing credit agreement
restricts its ability to pay dividends on common stock.
12
Item 6. Selected Financial Data
The following selected financial data has been derived from the consolidated
financial statements. The information set forth below is not necessarily
indicative of results of future operations, and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and related notes
thereto included elsewhere in this Form 10-K.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands except share and per share data)
Year Ended December 31
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS
DATA:(1)
Revenue................. $ 1,213,039 $ 1,034,503 $ 730,224 $ 583,068 $ 468,460
Costs and Expenses:
Commissions, fees and
other incentives..... 536,277 458,463 364,403 292,266 239,018
Operating,
administrative and
other................ 559,393 448,794 275,749 228,799 187,968
Merger-related and
other nonrecurring
charges.............. - 16,585 12,924 - -
Depreciation and
amortization......... 40,470 32,185 18,060 13,574 11,631
----------- ----------- ----------- ----------- -----------
Operating income........ 76,899 78,476 59,088 48,429 29,843
Interest income......... 1,930 3,054 2,598 1,503 1,674
Interest expense........ 39,368 31,047 15,780 24,123 23,267
----------- ----------- ----------- ----------- -----------
Income before provision
(benefit) for income
tax.................... 39,461 50,483 45,906 25,809 8,250
Provision (benefit) for
income tax............. 16,179 25,926 20,558 (44,740) 841
----------- ----------- ----------- ----------- -----------
Income before
extraordinary items.... 23,282 24,557 25,348 70,549 7,409
Extraordinary items,
net.................... - - 951 - -
----------- ----------- ----------- ----------- -----------
Net income.............. $ 23,282 $ 24,557 $ 24,397 $ 70,549 $ 7,409
=========== =========== =========== =========== ===========
Earnings (loss)
applicable to common
stockholders(2)........ $ 23,282 $ (7,716) $ 20,397 $ 69,549 $ 7,409
Basic earnings (loss)
per share(2)........... $ 1.11 $ (0.38) $ 1.34 $ 5.05 $ 0.55
Weighted average shares
outstanding for basic
earnings (loss) per
share(2)............... 20,998,097 20,136,117 15,237,914 13,783,882 13,499,862
Diluted earnings (loss)
per share(2)........... $ 1.10 $ (0.38) $ 1.28 $ 4.99 $ 0.55
Weighted average shares
outstanding for diluted
earnings (loss) per
share(2)............... 21,072,436 20,136,117 15,996,929 14,126,636 13,540,541
OTHER DATA:
EBITDA(3)............... $ 117,369 $ 127,246 $ 90,072 $ 62,003 $ 41,474
Net cash provided by
operating activities... $ 74,011 $ 76,614 $ 80,835 $ 65,694 $ 30,632
Net cash used in
investing activities... $ (26,767) $ (223,520) $ (18,018) $ (10,906) $ (24,888)
Net cash (used in)
provided by financing
activities............. $ (37,721) $ 119,438 $ (64,964) $ (28,505) $ (11,469)
December 31
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 27,844 $ 19,551 $ 47,181 $ 49,328 $ 23,045
Total assets............ 933,273 856,892 500,100 278,944 190,954
Total long-term debt.... 355,815 373,691 146,273 148,529 250,142
Total liabilities....... 719,664 660,175 334,657 280,364 345,642
Minority interest....... 3,872 5,875 7,672 95 -
Total stockholders'
equity (deficit)....... 209,737 190,842 157,771 (1,515) (154,688)
- -------
(1) The results include the activities of Koll from August 28, 1997 to
December 31, 1999, REI from April 17, 1998 to December 31, 1999 and HP
from July 7, 1998 to December 31, 1999.
(2) See Per Share Information in Note 12 of Notes to Consolidated Financial
Statements.
(3) EBITDA effectively removes the impact of certain non-cash and nonrecurring
charges on income such as depreciation and the amortization of intangible
assets relating to acquisitions, merger-related and other nonrecurring
charges. Management believes that the presentation of EBITDA will enhance
a reader's understanding of the Company's operating performance and
ability to service debt as it provides a measure of cash generated
(subject to the payment of interest and income taxes) that can be used by
the Company to service its debt and for other required or discretionary
purposes. Net cash that will be available to the Company for discretionary
purposes represents remaining cash, after debt service and other cash
requirements, such as capital expenditures, are deducted from EBITDA.
EBITDA should not be considered as an alternative to (i) operating income
determined in accordance with GAAP or (ii) operating cash flow determined
in accordance with GAAP.
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The Company provides real estate services through approximately 250 offices
worldwide including but not limited to the US, Argentina, Australia, Belgium,
Brazil, Canada, Chile, Czech Republic, Denmark, France, Germany, Hong Kong,
Hungary, India, Italy, the Netherlands, New Zealand, People's Republic of
China, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan, Turkey and the
UK. Over the course of the last five years, the Company, in recognition of a
rapidly changing structural and economic environment, has changed from being
almost exclusively a traditional US real estate broker to being a diversified
global real estate services firm. The Company's Transaction Management is one
of the largest such businesses in the US.
As part of its strategic emphasis in developing a worldwide business, the
Company has, since the beginning of 1995, completed multiple acquisitions, an
$87.0 million public offering of common stock and a $175.0 million offering of
senior subordinated notes. The Company is continually assessing acquisition
opportunities as part of its growth strategy. Because of the substantial non-
cash goodwill and intangible amortization charges incurred by the Company in
connection with acquisitions subject to purchase accounting and because of
interest expense associated with cash acquisition financing, management
anticipates that past acquisitions have and future acquisitions may adversely
affect net income, especially in the first several years following the
acquisition. This problem is compounded when, as in the case of the 1997
acquisition of Koll Real Estate Services ("Koll"), the amortization of
goodwill must be deducted for financial reporting purposes but is not
deductible for actual tax purposes with the result that the provision for
taxes for financial reporting purposes will for some period of time be 50-55%
when the actual cash tax rate is 40-45%. In addition, during the first six
months following an acquisition, the Company believes there are generally
significant one-time costs relating to integrating information technology,
accounting and management services and rationalizing personnel levels of the
combined operation (costs which the Company intends to take as a single charge
at the time of the acquisition to the maximum extent permissible). Management
does not intend to pursue acquisitions unless they are accretive to income
before interest expense and provision for amortization of goodwill and
intangibles and to operating cash flows (excluding the costs of integration).
Revenue from Transaction Management, which constitutes a substantial
majority of the Company's revenue, is subject to economic cycles. However, the
Company's significant size, geographic coverage, number of transactions and
large continuing client base tend to minimize the impact of economic cycles on
annual revenue and create what the Company believes is equivalent to a
recurring stream of revenue. Approximately 53% of the costs and expenses
associated with Transaction Management are directly correlated to revenue
while approximately 20% of the costs and expenses of Management Services and
Financial Services, are directly correlated to revenue.
A significant portion of the Company's revenue is seasonal. Historically,
this seasonality has caused the Company's revenue, operating income and net
income to be lower in the first two calendar quarters and higher in the third
and fourth calendar quarters of each year. In addition, the Company's
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. To date, the Company does not believe that general inflation has had a
material impact upon its operations. Revenues, commissions and other variable
costs related to revenues are primarily affected by real estate market supply
and demand rather than general inflation.
14
Results of Operations
The following table sets forth items derived from the Company's consolidated
statements of operations for the years ended December 31, 1999, 1998, and
1997, presented in dollars and as a percentage of revenue.
Year Ended December 31
-------------------------------------------------
1999 1998 1997
---------------- --------------- --------------
(Dollars in thousands)
Revenue:
Leases.................... $ 448,091 36.9% $ 371,300 35.9% $274,816 37.6%
Sales..................... 394,718 32.5 357,718 34.6 281,332 38.5
Property and facilities
management fees.......... 110,111 9.1 86,379 8.4 39,208 5.4
Consulting and referral
fees..................... 83,503 6.9 72,586 7.0 45,776 6.3
Appraisal fees............ 61,116 5.0 48,082 4.6 22,460 3.1
Loan origination and
servicing fees........... 40,564 3.4 39,402 3.8 27,120 3.7
Realty advisor fees....... 28,929 2.4 33,145 3.2 27,566 3.8
Other..................... 46,007 3.8 25,891 2.5 11,946 1.6
---------- ----- --------- ----- -------- -----
Total revenue........... 1,213,039 100.0 1,034,503 100.0 730,224 100.0
Costs and expenses:
Commissions, fees and
other incentives......... 536,277 44.2 458,463 44.3 364,403 49.9
Operating, administrative
and other................ 559,393 46.1 448,794 43.4 275,749 37.8
Merger-related and other
nonrecurring charges..... - - 16,585 1.6 12,924 1.8
Depreciation and
amortization............. 40,470 3.3 32,185 3.1 18,060 2.4
---------- ----- --------- ----- -------- -----
Operating income............ 76,899 6.4 78,476 7.6 59,088 8.1
Interest income............. 1,930 0.2 3,054 0.3 2,598 0.3
Interest expense............ 39,368 3.3 31,047 3.0 15,780 2.2
---------- ----- --------- ----- -------- -----
Income before provision for
income tax................. 39,461 3.3 50,483 4.9 45,906 6.2
Provision for income tax.... 16,179 1.3 25,926 2.5 20,558 2.8
---------- ----- --------- ----- -------- -----
Income before extraordinary
items...................... 23,282 2.0 24,557 2.4 25,348 3.4
Extraordinary items, net.... - - - - 951 0.1
---------- ----- --------- ----- -------- -----
Net income.................. $ 23,282 2.0% $ 24,557 2.4% $ 24,397 3.3%
========== ===== ========= ===== ======== =====
EBITDA...................... $ 117,369 9.7% $ 127,246 12.3% $ 90,072 12.3%
========== ===== ========= ===== ======== =====
The Company's results have benefitted from its ability to take advantage of
a growing US commercial real estate market and the generally rising occupancy
and rental levels and property values, as well as from significant expansion
into international markets. Since brokerage fees are typically based upon a
percentage of transaction value, and property management fees are typically
based upon a percentage of total rent collections, recent occupancy and rental
rate increases at the property level have generated an increase in brokerage
and property management fees to the Company.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The Company reported a consolidated net income of $23.3 million, or $1.10
diluted earnings per share for the year ended December 31, 1999, on revenues
of $1.213 billion compared to a consolidated net income of $24.6 million on
revenues of $1.035 billion for the year ended December 31, 1998. However,
including the $32.3 million deemed dividend resulting from the accounting
treatment of the preferred stock repurchase, the 1998 net loss applicable to
common stockholders was $7.7 million, or $0.38 diluted loss per share. To
improve operating results the Company implemented in 1999 a reduction in force
program which is expected to result in over $20 million in cost savings for
the year 2000. The 1999 result includes proceeds from an insurance policy
15
of $1.6 million, nonrecurring gains of $8.7 million from the sale of five non-
strategic offices and a small insurance operation, and one-time charges of
approximately $10.2 million, the majority of which were severance costs
related to the Company's reduction in workforce.
Revenues on a consolidated basis were $1.213 billion, an increase of $178.5
million or 17.3% for the year ended December 31, 1999, compared to the year
ended December 31, 1998. The overall increase related to the continued
improvement in the commercial real estate markets across the US as reflected
in increases in lease transactions and the full contribution from REI and HP
and various other 1998 acquisitions. Additionally, the Company continued to
benefit from its global market presence by leveraging the ability to deliver
comprehensive real estate services into new businesses.
Commissions, fees and other incentives on a consolidated basis were $536.3
million, an increase of $77.8 million or 17.0% for the year ended December 31,
1999, compared to the year ended December 31, 1998. The increase in these
costs is attributable to an increase in revenue and includes the impact of a
new commission-based program which enables sales professionals to earn
additional commission over a certain revenue threshold and full year
contribution from REI and HP and various 1998 acquisitions.
Operating, administrative and other on a consolidated basis was $559.4
million, an increase of $110.6 million or 24.6% for the year ended December
31, 1999, compared to the year ended December 31, 1998. As a percentage of
revenue, operating, administrative and other were 46.1% for the year ended
December 31, 1999 compared to 43.4% for the year ended December 31, 1998. The
increase in amount and percentage is due to the acquisitions of REI and HP and
higher operating expenses.
Consolidated interest income was $1.9 million, a decrease of $1.1 million or
36.8% for the year ended December 31, 1999, as compared to the year ended
December 31, 1998 due to a decrease in average cash balances during 1999.
Consolidated interest expense was $39.4 million, an increase of $8.3 million
or 26.8% for the year ended December 31, 1999, as compared to the year ended
December 31, 1998. The increase resulted from the renewal of certain senior
term loans at a higher borrowing rate and higher borrowing levels during 1999.
Provision for income tax on a consolidated basis was $16.2 million for the
year ended December 31, 1999, as compared to the provision for income tax of
$25.9 million for the year ended December 31, 1998. The decrease is primarily
due to the decrease in income before provision for income tax and the release
of $6.3 million net operating loss ("NOL") valuation allowances as it became
evident that it is more likely than not the Company would generate sufficient
taxable income to utilize a portion of the Company's NOL from prior years,
resulting in a decrease in the effective tax rate. In early 1998 the Company
repurchased its outstanding preferred stock which triggered a limitation on
the annual amount of NOL it can use to offset future US taxable income. This
limitation does not affect the way taxes are reported for financial reporting
purposes, but it will affect the timing of the actual amount of taxes paid on
an annual basis.
EBITDA was $117.4 million for the year ended December 31, 1999, as compared
to $127.2 million for the year ended December 31, 1998. EBITDA effectively
removes the impact of certain non-cash and nonrecurring charges on income such
as depreciation, amortization of intangible assets relating to acquisitions
and merger-related and other nonrecurring charges. Management believes that
the presentation of EBITDA will enhance a reader's understanding of the
Company's operating performance and ability to service debt as it provides a
measure of cash generated (subject to the payment of interest and income
taxes) that can be used by the Company to service its debt and for other
required or discretionary purposes. Net cash that will be available to the
Company for discretionary purposes represents remaining cash after debt
service and other cash requirements, such as capital expenditures, are
deducted from EBITDA. EBITDA should not be considered as an alternative to (i)
operating income determined in accordance with GAAP or (ii) operating cash
flow determined in accordance with GAAP.
16
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company reported a consolidated net loss applicable to common
stockholders of $7.7 million, or $0.38 diluted loss per share for the year
ended December 31, 1998, on revenues of $1.035 billion, compared to a
consolidated net earnings applicable to common stockholders of $20.4 million
on revenues of $730.2 million for the year ended December 31, 1997. Excluding
the deemed dividend of $32.3 million and merger-related and other nonrecurring
charges of $16.6 million, and related tax effect, diluted earnings would have
been $1.68 per share.
Revenues on a consolidated basis were $1.035 billion, an increase of $304.3
million or 41.7% for the year ended December 31, 1998, compared to the year
ended December 31, 1997. The overall increase reflected a continued
improvement in the commercial real estate markets across the US, a full
contribution from Koll and a partial contribution from REI and HP and various
other 1998 acquisitions. This improvement reflected both the Company's
position and increasing consumer confidence in the US and European economies
and, in particular, real estate assets and improving real estate market
liquidity. Additionally, the Company continued to benefit from its global
market presence by leveraging the ability to deliver comprehensive real estate
services into new businesses. However, revenues for the fourth quarter and
1998 as a whole were adversely affected by the liquidity problems in the
global capital markets in general and the CMBS market in particular, which
began in September of 1998.
Commissions, fees and other incentives on a consolidated basis were $458.5
million, an increase of $94.1 million or 25.8% for the year ended December 31,
1998, compared to the year ended December 31, 1997. The increase in these
costs is attributable to the increase in revenue since most of the Company's
sales professionals are compensated based on revenue. As a percentage of
revenue, commissions fees and other incentives were 44.3% for the year ended
December 31, 1998, compared to 49.9% for the year ended December 31, 1997. The
decrease as a percentage of revenue is primarily due to the acquisition of
Koll, which has a higher percentage of base management fee revenue which has
no related commission expense.
Operating, administrative and other on a consolidated basis was $448.8
million, an increase of $173.0 million or 62.8% for the year ended December
31, 1998, compared to the year ended December 31, 1997. As a percentage of
revenue, operating, administrative and other were 43.4% for the year ended
December 31, 1998 compared to 37.8% for the year ended December 31, 1997. The
increase in amount and percentage is primarily due to the building of an
infrastructure in anticipation of improved market environment which was not
fully realized in 1998 and the acquisition of Koll, REI and HP which have
relatively higher fixed operating expenses. Due to the integration of Koll and
the partial integration of REI and HP, operating, administrative and other as
a percentage of revenue has increased, while commissions, fees and other
incentives as a percentage of revenue has decreased.
Merger-related and other nonrecurring charges were $16.6 million for the
year ended December 31, 1998. These charges represent $3.8 million of costs
associated with the integration of REI's operations and systems into the
Company's, $3.8 million related to name change costs, and $9.0 million related
to the write-down in the carrying value of the Company's headquarters building
to its estimated fair market value.
Consolidated interest income was $3.1 million, an increase of $0.5 million
or 17.6% for the year ended December 31, 1998, as compared to the year ended
December 31, 1997.
Consolidated interest expense was $31.0 million, an increase of $15.3
million or 96.7% for the year ended December 31, 1998, as compared to the year
ended December 31, 1997. The increase resulted from the issuance of senior
subordinated notes and increased revolving credit facility borrowings which
were used for the repurchase of the Company's preferred stock and to acquire
businesses.
Provision for income tax on a consolidated basis was $25.9 million for the
year ended December 31, 1998, as compared to the provision for income tax of
$20.6 million for the year ended December 31, 1997. The increase is
attributable to increased earnings which include international earnings from
various foreign jurisdictions. In
17
early 1998 the Company repurchased its outstanding preferred stock which
triggered a limitation on the annual amount of NOL it can use to offset future
US taxable income. This limitation does not affect the way taxes are reported
for financial reporting purposes, but it will affect the timing of the actual
amount of taxes paid on an annual basis. The increase in the effective tax
rate is primarily the result of additional nonamortizable goodwill from recent
acquisitions and losses in certain foreign jurisdictions for which no tax
benefit is received.
EBITDA, excluding merger-related and other nonrecurring costs was $127.2
million for the year ended December 31, 1998, as compared to $90.1 million for
the year ended December 31, 1997. EBITDA effectively removes the impact of
certain non-cash and nonrecurring charges on income such as depreciation and
the amortization of intangible assets relating to acquisitions, merger-related
and other nonrecurring charges. Management believes that the presentation of
EBITDA will enhance a reader's understanding of the Company's operating
performance and ability to service debt as it provides a measure of cash
generated (subject to the payment of interest and income taxes) that can be
used by the Company to service its debt and for other required or
discretionary purposes. Net cash that will be available to the Company for
discretionary purposes that represents remaining cash after debt service and
other cash requirements, such as capital expenditures, are deducted from
EBITDA. EBITDA should not be considered as an alternative to (i) operating
income determined in accordance with GAAP or (ii) operating cash flow
determined in accordance with GAAP.
18
Segment Operations
The Company provides integrated real estate services through three global
business segments. The three segments are Transaction Management, Financial
Services and Management Services. The factors for determining the reportable
segments were based on the type of service and client and the way the chief
operating decision makers organize segments within the Company for making
operating decisions and assessing performance. Each business segment requires
and is responsible for executing a unique marketing and business strategy.
Transaction Management consists of commercial property sales and leasing
services, transaction management and advisory services, investment property
services (acquisitions and sales on behalf of investors). Financial Services
consists of mortgage loan origination and servicing through L.J. Melody,
investment management and advisory services through CBRE Investors, capital
markets activities, valuation and appraisal services and real estate market
research. Management Services consists of facilities and property management
and related services. In July 1999, the Company announced that it changed its
segment reporting from four segments to three segments. Prior periods have
been restated to conform to the new segmentation. The following tables
summarize the revenue, cost and expenses, and operating income by operating
segment for the years ended December 31, 1999, 1998 and 1997.
Year Ended December 31
------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
(Dollars in thousands)
Transaction Management
Revenue:
Leases..................... $426,108 48.3 % $352,811 46.2% $259,426 44.6%
Sales...................... 383,726 43.5 330,206 43.3 276,097 47.5
Other consulting and
referral fees(1).......... 71,847 8.2 79,934 10.5 45,600 7.9
-------- ----- -------- ----- -------- -----
Total revenue............ 881,681 100.0 % 762,951 100.0% 581,123 100.0%
Costs and expenses:
Commissions, fees and
other incentives.......... 469,415 53.2 405,393 53.1 325,673 56.1
Operating, administrative
and other................. 313,061 35.5 262,604 34.4 179,790 30.9
Depreciation and
amortization.............. 18,236 2.1 13,722 1.8 8,640 1.5
-------- ----- -------- ----- -------- -----
Operating income(2)......... $ 80,969 9.2 % $ 81,232 10.7% $ 67,020 11.5%
======== ===== ======== ===== ======== =====
EBITDA...................... $ 99,205 11.3 % $ 94,954 12.5% $ 75,660 13.0%
-------- ----- -------- ----- -------- -----
Financial Services
Revenue:
Appraisal fees............. $ 59,074 33.3 % $ 48,090 33.1% $ 22,460 25.0%
Loan origination and
servicing fees............ 40,562 22.9 39,402 27.1 27,107 30.2
Realty advisor fees........ 27,323 15.4 32,591 22.4 27,566 30.7
Other(1)................... 50,520 28.4 25,167 17.4 12,647 14.1
-------- ----- -------- ----- -------- -----
Total revenue............ 177,479 100.0 % 145,250 100.0% 89,780 100.0%
Costs and expenses:
Commissions, fees and
other incentives.......... 55,419 31.2 41,491 28.6 24,186 26.9
Operating, administrative
and other................. 111,634 62.9 85,885 59.1 55,860 62.2
Depreciation and
amortization.............. 12,707 7.2 11,025 7.6 6,764 7.5
-------- ----- -------- ----- -------- -----
Operating income (loss)(2).. $ (2,281) (1.3)% $ 6,849 4.7% $ 2,970 3.4%
======== ===== ======== ===== ======== =====
EBITDA...................... $ 10,426 5.9 % $ 17,874 12.3% $ 9,734 10.9%
======== ===== ======== ===== ======== =====
Management Services
Revenue:
Property management fees... $ 81,836 53.2 % $ 67,300 53.3% $ 30,609 51.6%
Facilities management
fees...................... 23,755 15.4 17,219 13.6 3,796 6.4
Leases..................... 21,284 13.8 17,281 13.7 15,310 25.8
Sales...................... 5,271 3.4 5,252 4.2 3,751 6.3
Other(1)................... 21,733 14.2 19,250 15.2 5,855 9.9
-------- ----- -------- ----- -------- -----
Total revenue............ 153,879 100.0 % 126,302 100.0% 59,321 100.0%
Costs and expenses:
Commissions, fees and
other incentives.......... 11,443 7.4 11,579 9.2 14,544 24.5
Operating, administrative
and other................. 134,698 87.6 100,305 79.4 40,099 67.6
Depreciation and
amortization.............. 9,527 6.2 7,438 5.9 2,656 4.5
-------- ----- -------- ----- -------- -----
Operating income (loss)(2).. $ (1,789) (1.2)% $ 6,980 5.5% $ 2,022 3.4%
======== ===== ======== ===== ======== =====
EBITDA...................... $ 7,738 5.0 % $ 14,418 11.4% $ 4,678 7.9%
======== ===== ======== ===== ======== =====
Merger-related and other
nonrecurring charges....... $ - $ 16,585 $ 12,924
======== ======== ========
Total operating income...... $ 76,899 $ 78,476 $ 59,088
======== ======== ========
Total EBITDA excluding
merger-related and other
nonrecurring charges....... $117,369 $127,246 $ 90,072
======== ======== ========
- -------
(1) Revenue is allocated by material line of business specific to each
segment. "Other" includes types of revenue that have not been broken out
separately due to their immaterial balances and/or nonrecurring nature
within each segment. Certain revenue types disclosed on the consolidated
statements of operations may not be derived directly from amounts shown in
this table.
(2) Segment operating income excludes merger-related and other nonrecurring
charges.
19
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Transaction Management
Revenue increased by $118.7 million or 15.6% for the year ended December 31,
1999, compared to the year ended December 31, 1998, due to the continued
improvement of the real estate market, mainly in brokerage leasing services
and the full contribution of REI and HP and various other 1998 acquisitions.
Commissions, fees and other incentives increased by $64.0 million or 15.8% for
the year ended December 31, 1999, compared to the year ended December 31,
1998, primarily due to an increase in revenue and includes the impact of a new
commission-based program which enables sales professionals to earn additional
commission over a certain revenue threshold and full year contribution from
REI and HP and various 1998 acquisitions. Operating, administrative, and other
increased by $50.5 million or 19.2% for the year ended December 31, 1999,
compared to the year ended December 31, 1998. The increase in the amount is
primarily due to the increase in operating expenses and the inclusion of REI
and HP and various other 1998 acquisitions. Depreciation and amortization
increased by $4.5 million or 32.9% for the year ended December 31, 1999, as
compared to the year ended December 31, 1998, primarily as a result of
additional investments in hardware and software to support the increase in new
business.
Financial Services
Revenue increased by $32.2 million or 22.2% for the year ended December 31,
1999, compared to the year ended December 31, 1998. The increase in revenue is
primarily due to the appraisal and valuation services and other revenue which
includes the full contribution from REI and HP and various other 1998
acquisitions. Commissions, fees and other incentives increased by $13.9
million or 33.6% for the year ended December 31, 1999, compared to the year
ended December 31, 1998. The increase is primarily a result of the revenue
increase. Operating, administrative, and other increased by $25.7 million or
30.0% for the year ended December 31, 1999, compared to the year ended
December 31, 1998, primarily as a result of increased operating expenses and
the integration of REI and HP and various other 1998 acquisitions.
Depreciation and amortization increased by $1.7 million or 15.3% for the year
ended December 31, 1999, as compared to the year ended December 31, 1998,
primarily related to the additional investment in hardware and software to
support the increase in new business and the acquisitions of REI and HP and
various other 1998 acquisitions.
Management Services
Revenue increased by $27.6 million or 21.8% for the year ended December 31,
1999, compared to the year ended December 31, 1998, primarily due to growth in
the facilities management businesses and the full contribution from REI and HP
and various other 1998 acquisitions. Commissions, fees and other incentives
decreased by $0.1 million or 1.2% for the year ended December 31, 1999,
compared to the year ended December 31, 1998. Operating, administrative, and
other increased $34.4 million or 34.3% for the year ended December 31, 1999,
compared to the year ended December 31, 1998, primarily related to the
acquisitions of REI and HP, higher operating expenses, and the investment in
infrastructure to expand business. Depreciation and amortization increased by
$2.1 million or 28.1% for the year ended December 31, 1999, as compared to the
year ended December 31, 1998, primarily related to the acquisitions of REI and
HP and various other 1998 acquisitions.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Transaction Management
Revenue increased by $181.8 million or 31.3% for the year ended December 31,
1998, compared to the year ended December 31, 1997, due to the continued
improvement of the real estate market primarily in brokerage sales and lease
transactions, the full contribution of Koll and the partial contribution of
REI and HP. Commissions, fees and other incentives increased by $79.7 million
or 24.5% for the year ended December 31, 1998, compared to the year ended
December 31, 1997, primarily due to increased revenues, which resulted in
higher commission eligibility levels, and, thus, higher commissions. As a
percentage of revenue, commissions, fees and other incentives were 53.1% for
the year ended December 31, 1998 compared to 56.1% for the year
20
ended December 31, 1997. The decrease in commissions, fees and other
incentives as a percentage of revenue is primarily due to the integration of
REI and HP which generally do not operate under a variable commission-based
program. Operating, administrative, and other increased by $82.8 million or
46.1% for the year ended December 31, 1998, compared to the year ended
December 31, 1997. The increase in the amount and percentage is primarily a
result of additional personnel requirements, the acquisition of Koll, which
has higher fixed operating expenses and the investment in infrastructure to
expand business from the integration of REI and HP. Depreciation and
amortization increased by $5.1 million or 58.8% for the year ended
December 31, 1998, as compared to the year ended December 31, 1997, primarily
as a result of additional investments in hardware and software to support the
increase in new business and the acquisitions of Koll, REI and HP.
Financial Services
Revenue increased by $55.5 million or 61.8% for the year ended December 31,
1998, compared to the year ended December 31, 1997. The increase in revenue is
primarily due to the full contribution of Koll, partial contribution of REI
and HP and growth at the mortgage banking and valuations units. Commissions,
fees and other incentives increased by $17.3 million or 71.5% for the year
ended December 31, 1998, compared to the year ended December 31, 1997. The
increase is primarily a result of the revenue increase and the resulting
higher commission eligibility level in mortgage banking and valuation and
appraisal services. Operating, administrative, and other increased by $30.0
million or 53.8% for the year ended December 31, 1998, compared to the year
ended December 31, 1997, primarily as a result of business promotion expenses
and additional personnel requirements, and the full integration of Koll and
the partial integration of REI and HP. Depreciation and amortization increased
by $4.3 million or 63.0% for the year ended December 31, 1998, as compared to
the year ended December 31, 1997, primarily related to the additional
investment in information systems hardware and software to support the
increase in new business and the acquisitions of Koll, REI and HP.
Management Services
Revenue increased by $67.0 million or 112.9% for the year ended December 31,
1998, compared to the year ended December 31, 1997, primarily due to
management's ability to achieve greater efficiency in operations and leverage
the revenue base of Koll and other acquired companies. Commissions, fees and
other incentives decreased by $3.0 million or 20.4% for the year ended
December 31, 1998, compared to the year ended December 31, 1997, primarily
because the base contract management fee revenues, which increased as a result
of the acquisition of Koll, do not have corresponding commission expenses.
Operating, administrative, and other increased $60.2 million or 150.1% for the
year ended December 31, 1998, compared to the year ended December 31, 1997.
The increase in amount and percentage is primarily due to the full integration
of Koll and the partial integration of REI and HP. Depreciation and
amortization increased by $4.8 million or 180.0% for the year ended December
31, 1998, compared to the year ended December 31, 1997, primarily related to
the acquisitions of Koll and REI.
Liquidity and Capital Resources
The Company has historically financed its operations and non-acquisition
related capital expenditures primarily with internally generated funds and
borrowings under a revolving credit facility. The Company had net repayments
of $7.0 million to the revolving credit facility, for the year ended December
31, 1999, due to the positive cash flows from operating activities. The
Company's EBITDA was $117.4 million and $127.2 million for the years ended
December 31, 1999 and 1998, respectively.
Net cash provided by operating activities was $74.0 million for the year
ended December 31, 1999, compared to $76.6 million for the year ended December
31, 1998. The change is primarily due to changes in components of operating
assets and liabilities.
Net cash used in investing activities was $26.8 million for the year ended
December 31, 1999, compared to $223.5 million for the year ended December 31,
1998. The change is primarily due to a lower level of acquisition of
businesses, the sale of various non-strategic offices and the inventoried
property, and the absence in 1999 of the supplemental purchase price payments
included in 1998 in connection with a 1995 acquisition.
21
Net cash used in financing activities was $37.7 million for the year ended
December 31, 1999, compared to $119.4 million provided by financing activities
for the year ended December 31, 1998. The decrease primarily results from
increases in repayments of the inventoried property loan, the revolving credit
facility and other loans.
At December 31, 1999, the Company had $361.1 million outstanding in total
indebtedness, consisting primarily of acquisition debt. Annual aggregate
maturities of total debt at December 31, 1999 are as follows: 2000--$5.3
million; 2001--$2.4 million; 2002--$3.3 million; 2003--$160.0 million; 2004--
$0.1 million; and $190.0 million thereafter.
In May 1998, the Company amended its revolving credit facility with a group
of banks to provide up to $400.0 million for five years, subject to mandatory
reductions of $40.0 million, $80.0 million and $80.0 million on December 31,
1999, 2000 and 2001, respectively. Subsequently, in October 1999, the Company
executed an amendment to the revolving credit facility, reducing the facility
to $350.0 million, eliminating the mandatory reduction on December 31, 1999,
and revising some of the restrictive covenants. The new amendment is also
subject to mandatory reductions of the facility by $80.0 million and $70.0
million on December 31, 2000 and 2001, respectively. The amount outstanding
under this facility was $160.0 million at December 31, 1999 which is included
in the accompanying consolidated balance sheets. Interest rate alternatives
include Bank of America's reference rate plus 1.00% and LIBOR plus 2.50%. The
weighted average rate on amounts outstanding at December 31, 1999 was 8.45%.
The revolving credit facility contains numerous restrictive covenants that,
among other things, limit the Company's ability to incur or repay other
indebtedness, make advances or loans to subsidiaries and other entities, make
capital expenditures, incur liens, enter into mergers or effect other
fundamental corporate transactions, sell its assets, or declare dividends. In
addition, the Company is required to meet certain ratios relating to its
adjusted net worth, level of indebtedness, fixed charges and interest
coverage.
The Company expects to have capital expenditures ranging from $15 million to
$25 million in 2000. The Company expects to use net cash provided by operating
activities for the next several years primarily to fund capital expenditures
for computer related purchases, acquisitions, including earnout payments, and
to make required principal payments under the Company's outstanding
indebtedness. The Company believes that it can satisfy its non-acquisition
obligations as well as working capital requirements from internally generated
cash flow, borrowings under the amended revolving credit facility or any
replacement credit facilities. Material future acquisitions, if any, that
require cash will require new sources of capital such as an expansion of the
amended revolving credit facility and raising money by issuing additional debt
or equity. The Company anticipates that its existing sources of liquidity,
including cash flow from operations, will be sufficient to meet the Company's
anticipated non-acquisition cash requirements for the foreseeable future and
in any event for at least the next twelve months.
In connection with an on-going stock repurchase program, the Company
purchased 396,200 shares of common stock for approximately $5.0 million in
1999 and 488,900 shares of common stock for approximately $8.9 million in
1998.
Year 2000 Issues
Prior to the Year 2000 rollover event, the Company evaluated all computing
systems, application programs, information processing hardware and software,
and telecommunications systems to determine their ability to function in the
Year 2000. Based on this evaluation, the Company developed and implemented
detailed plans for upgrades, conversions and/or replacements. The Company
completed the conversions and testing in the fourth quarter of 1999.
Throughout the weekend of December 31, 1999 through January 3, 2000, the
Company conducted thorough testing of its core business applications and
computing systems used for processing all lines of business to ensure a Y2K
readiness. As of January 2000, all testing was completed and the Company
returned to normal daily operations. To date, the Company has not experienced
any Year 2000 related issues.
22
The Company estimates that it has spent in total approximately $13.5 million
to address the Y2K issues which includes replacing and upgrading the affected
hardware and software. The Company does not track the cost and time that its
own internal employees spent on the Y2K project.
Euro Conversion Disclosure
A majority of the European Union member countries converted to a common
currency, the "Euro," on January 1, 1999. The existing legacy currencies of
the participating countries will continue to be acceptable until January 1,
2002. The Company does not expect the introduction of the Euro to have a
significant impact on its market or the manner in which it conducts business,
and believes the related impact on the Company's financials is not material.
Approximately 5% of the Company's 1999 business was transacted in the
participating member countries. The Company is currently using both the Euro
and legacy currencies to conduct business in these member countries.
The Company is in the process of replacing or upgrading the various items of
hardware and software to allow for dual-currency reporting during the
transition period, and issues related but not limited to converting amounts
and rounding. The Company anticipates these system upgrades will be fully
functional prior to the end of the transition period.
Recent Acquisitions
During 1999, the Company acquired four companies with an aggregate purchase
price of approximately $13.8 million. The two significant acquisitions were
Eberhardt Company which was acquired in September 1999 through L.J. Melody for
approximately $7 million and Profi Nordic which was acquired in February 1999
through CBRE Profi Acquisition Corp. (formerly Koll Tender III) for
approximately $5.5 million.
On October 20, 1998 the Company, through L.J. Melody, purchased Carey,
Brumbaugh, Starman, Phillips, and Associates, Inc., a regional mortgage
banking firm for approximately $5.6 million in cash and approximately $2.4
million in notes bearing interest at 9.0% with three annual payments which
began in October 1999. Approximately $0.2 million of the $2.4 million notes
was accounted for as deferred cash compensation to certain key executives. The
acquisition was accounted for as a purchase. The purchase price has largely
been allocated to intangibles and goodwill which are amortized on a straight
line basis over their estimated useful lives of 7 and 30 years, respectively.
On October 1, 1998 the Company purchased the remaining ownership interests
that it did not already own in the Richard Ellis Australia and New Zealand
businesses. The costs for the remaining interest was $20.0 million in cash.
Virtually all of the revenue of these locations is derived from brokerage and
appraisal services. The acquisition was accounted for as a purchase. The
purchase price has largely been allocated to intangibles and goodwill which
are amortized on a straight line basis over their estimated useful lives
ranging up to 30 years.
On September 22, 1998 the Company purchased the approximately 73.0% interest
that it did not already own in CB Commercial Real Estate Group of Canada, Inc.
The Company acquired the remaining interest for approximately $14.3 million in
cash. The acquisition was accounted for as a purchase. The purchase price has
been largely allocated to intangibles and goodwill which are amortized on a
straight line basis over their estimated useful lives ranging up to 30 years.
On July 7, 1998 the Company acquired the business of Hillier, Parker, May
and Rowden, now known as CB Hillier Parker Limited, a commercial property
services partnership operating in the UK. The acquisition was accounted for as
a purchase. The purchase price for HP included approximately $63.6 million in
cash and $7.1 million in shares of the Company's common stock. In addition,
the Company assumed a contingent payout plan for key HP employees with a
potential payout over three years of approximately $13.9 million and assumed
various annuity obligations of approximately $15.0 million. The purchase price
has largely been allocated to goodwill which is amortized on a straight line
basis over its estimated useful life of 30 years.
On July 1, 1998 the Company increased its ownership percentage in CB
Commercial/Arnheim & Neely, an existing partnership formed in September 1996,
which then combined with the Galbreath Company Mid-Atlantic
23
to form CB Richard Ellis/Pittsburgh, LP. The total purchase price of the
Company's 50% interest in the combined enterprise is $5.7 million.
On May 31, 1998 the Company acquired Mathews Click and Associates, a
property sales, leasing, and management firm, for approximately $10.0 million
in cash and potential supplemental payments of $1.9 million which are
contingent upon operating results, payable to the sellers over a period of two
years. The acquisition was accounted for as a purchase. The total purchase
price including potential supplemental payments was allocated to intangibles
and goodwill which are amortized on a straight line basis over their estimated
useful lives of 7 and 30 years, respectively.
Effective May 1, 1998 the Company, through L.J. Melody, acquired Shoptaw-
James, Inc., a regional mortgage banking firm, for approximately $6.3 million
in cash and approximately $2.7 million in notes bearing interest at 9.0% with
three annual payments which began in May 1999. The acquisition was accounted
for as a purchase. Approximately $0.3 million of the $2.7 million notes are
being accounted for as compensation over the term of the notes as the payment
of these notes are contingent upon certain key executives' and producers'
continued employment with the Company. The approximate $2.4 million of the
$2.7 million is being accounted for as supplemental payments to the sellers
over a period of three years. The purchase price and supplemental payments
have largely been allocated to intangibles and goodwill which are amortized on
a straight line basis over their estimated useful lives of 7 and 30 years,
respectively.
On April 17, 1998 the Company purchased all of the outstanding shares of
REI, an international commercial real estate services firm operating under the
name Richard Ellis in major commercial real estate markets worldwide
(excluding the UK). The acquisition was accounted for as a purchase. The
purchase price has largely been allocated to goodwill, which is amortized on a
straight line basis over an estimated useful life of 30 years. The purchase
price for REI was approximately $104.8 million of which approximately $53.3
million was paid in cash and notes and approximately $51.5 million was paid in
shares of the Company's common stock. In addition, the Company assumed
approximately $14.4 million of long-term debt and minority interest. The
Company incurred a one-time charge of $3.8 million associated with the
integration of REI's operations and systems into the Company's.
On February 1, 1998 the Company, through L.J. Melody, acquired all of the
issued and outstanding stock of Cauble and Company of Carolina, a regional
mortgage banking firm for approximately $2.2 million, including cash payments
of approximately $1.8 million and a note payable of approximately $0.4 million
bearing interest at 9.0% with principal payments starting in April 1998. The
acquisition was accounted for as a purchase. The purchase price has largely
been allocated to intangibles and goodwill, which are amortized on a straight
line basis over their estimated useful lives of 7 and 30 years, respectively.
On January 31, 1998 the Company, through L.J. Melody, acquired certain
assets of North Coast Mortgage Company, a regional mortgage banking firm for
cash payments of approximately $3.0 million and approximately $0.9 million in
notes. Approximately $0.3 million of the $0.9 million notes have been
accounted for as supplemental payments to the sellers and approximately $0.6
million as deferred compensation to certain key executives and producers
payable in three annual installments which began in February 1999. The
acquisition was accounted for as a purchase. The purchase price and
supplemental payments have largely been allocated to intangibles and goodwill,
which are amortized on a straight line basis over their estimated useful lives
of 7 and 30 years, respectively. The $0.6 million of deferred cash
compensation is being accounted for as compensation over the term of the
agreements as the payment of the compensation is contingent upon certain key
executives' and producers' continued employment with the Company.
On August 28, 1997 the Company purchased Koll Real Estate Services through a
merger. The acquisition was accounted for as a purchase and resulted in the
issuance of equity valued at approximately $132.9 million and the assumption
of debt and minority interest of approximately $57.4 million as of August 28,
1997. The initial purchase price, in excess of the net identifiable assets
acquired, totaled $95.3 million, including $20.0 million relating to incentive
fees on investments fund partnerships which is earned as assets within the
funds are sold, is included, net of amortization, in goodwill and other
intangible assets, respectively, in the
24
accompanying consolidated balance sheets. Goodwill is being amortized on a
straight line basis over an estimated useful life of 30 years. In the third
quarter of 1997 the Company recorded the effects of a charge for merger-
related costs of $11.2 million, which is included in total merger-related
costs of $12.9 million.
Litigation
In December 1996, GMH Associates, Inc. ("GMH") filed a lawsuit against
Prudential and the Company in Superior Court of Pennsylvania, Franklin County,
alleging various contractual and tort claims against Prudential, the seller of
a large office complex, and the Company, its agent in the sale, contending
that Prudential breached its agreement to sell the property to GMH, breached
its duty to negotiate in good faith, conspired with the Company to conceal
from GMH that Prudential was negotiating to sell the property to another
purchaser and that Prudential and the Company misrepresented that there were
no other negotiations for the sale of the property. Following a non-jury
trial, the court rendered a decision in favor of GMH and against Prudential
and the Company, awarding GMH $20.3 million in compensatory damages, against
Prudential and the Company jointly and severally, and $10.0 million in
punitive damages, allocating the punitive damage award $7.0 million as against
Prudential and $3.0 million as against the Company. Following the denial of
motions by Prudential and the Company for a new trial, a judgment was entered
on December 3, 1998. Prudential and the Company filed an appeal of the
judgment. On March 3, 2000 the appellate court in Pennsylvania reversed all of
the trial courts' decisions finding that liability was not supported on any
theory claimed by GMH and directed that a judgement be entered in favor of the
defendants including the Company. The plaintiff has filed an appeal with the
Pennsylvania Supreme Court.
In August 1993, a former commissioned sales person of the Company filed a
lawsuit against the Company in the Superior Court of New Jersey, Bergen
County, alleging gender discrimination and wrongful termination by the
Company. On November 20, 1996, a jury returned a verdict against the Company,
awarding $1.5 million in general damages and $5.0 million in punitive damages
to the plaintiff. Subsequently, the trial court awarded the plaintiff $638,000
in attorneys' fees and costs. Following denial by the trial court of the
Company's motions for new trial, reversal of the verdict and reduction of
damages, the Company filed an appeal of the verdict and requested a reduction
of damages. On March 9, 1999 the appellate court ruled in the Company's favor,
reversed the trial court decision and ordered a new trial. On February 16,
2000 the Supreme Court of New Jersey reversed the decision of the appellate
court, concluded that the general damage award in the trial court should be
sustained and returned the case to the appellate court for a determination as
to whether a new trial should be ordered on the issue of punitive damages.
Based on available reserves, cash and anticipated cash flows, the Company
believes that the ultimate outcome of this case will not have an impact on the
Company's ability to carry on its operations.
The Company is a party to a number of pending or threatened lawsuits arising
out of, or incident to, its ordinary course of business. Based on available
cash and anticipated cash flows, the Company believes that the ultimate
outcome will not have an impact on the Company's ability to carry on its
operations. Management believes that any liability to the Company that may
result from disposition of these lawsuits will not have a material effect on
the consolidated financial position or results of operations of the Company.
Net Operating Losses
The Company had federal income tax NOLs of approximately $57.4 million at
December 31, 1999, corresponding to $20.1 million of the Company's $60.3
million in net deferred tax assets before valuation allowances, which expire
in the years 2004 to 2008.
The ability of the Company to utilize NOLs was limited in 1998 and will be
in subsequent years as a result of the Company's 1996 public offering, the
1997 Koll acquisition and the 1998 repurchase of preferred stock which
cumulatively caused a more than 50.0% change of ownership within a three year
period. As a result of the limitation, the Company will be able to use
approximately $26.0 million of its NOL in 1999 and in each subsequent year.
The amount of NOLs is, in any event, subject to some uncertainty until the
statute of limitation lapses.
25
Segment Reporting
In July 1999, the Company announced that it changed its segment reporting
from four segments to three segments. Prior periods have been restated to
conform to the new segmentation.
New Accounting Pronouncements
In 1999, the Company adopted Statement of Position 98-5, Reporting on the
Costs of Start-up Activities, which requires costs of start-up activities and
organization costs to be expensed as incurred. The adoption of this statement
did not have a material impact on the Company's financial statements.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133, which deferred the effective date of SFAS No. 133
for one year. SFAS No. 137 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company has not yet quantified the
impacts of adopting SFAS No. 133 on its financial statements and has not
determined the timing of or method of its adoption of SFAS No. 133. SFAS No.
133 is not anticipated to have any impact on earnings or other components of
comprehensive income as the Company had no derivatives outstanding at December
31, 1999.
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the quarter ended December 31, 1998.
SFAS No. 131 requires the use of the "management approach" for segment
reporting, which is based on the way the chief operating decision maker
organizes segments within a company for making operating decisions and
assessing performance. The adoption of this statement did not have a material
impact on the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
Safe Harbor Statement Regarding Outlook and Other Forward-Looking Data
Portions of the Annual Report, including Management's Discussion and
Analysis, contain forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the Company's actual results
and performance in future periods to be materially different from any future
results or performance suggested in forward-looking statements in this
release. Such forward-looking statements speak only as of the date of this
report and the Company expressly disclaims any obligation to update or revise
any forward-looking statements found herein to reflect any changes in Company
expectations or results or any change in events. Factors that could cause
results to differ materially include, but are not limited to: commercial real
estate vacancy levels; employment conditions and their effect on vacancy
rates; property values; rental rates; any general economic recession
domestically or internationally; and general conditions of financial liquidity
for real estate transactions.
Report of Management
The Company's management is responsible for the integrity of the financial
data reported by the Company and its subsidiaries. Fulfilling this
responsibility requires the preparation and presentation of consolidated
financial statements in accordance with generally accepted accounting
principles. Management uses internal accounting controls, corporate-wide
policies and procedures and judgment so that such statements reflect fairly
the consolidated financial position, results of operations and cash flows of
the Company.
26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk consists of foreign currency exchange
rate fluctuations related to international operations and changes in interest
rates on debt obligations.
Following the REI and HP acquisitions, approximately 22% of the Company's
business is transacted in currencies of foreign countries. The Company
attempts to manage its exposure primarily by balancing monetary assets and
liabilities, and maintaining cash positions only at levels necessary for
operating purposes. While the Company's international results of operations as
measured in dollars are subject to foreign exchange rate fluctuations, the
related risk is not considered material. The Company routinely monitors its
transaction exposure to currency rate changes, and enters into currency
forward and option contracts to limit such exposure, as appropriate. Such
contracts are usually short term in nature ranging from ten days to two
months. Gains and losses on contracts are deferred until the transaction being
hedged is finalized. In 1999, the Company did not enter into any derivative
contracts. The Company does not engage in any speculative activities.
The Company manages its interest expense by using a combination of fixed and
variable rate debt. The Company utilizes sensitivity analyses to assess the
potential effect of its variable rate debt. If interest rates were to increase
by 80 basis points (approximately 10.0% of the Company's weighted-average
variable rate at year-end), the net impact would be a decrease of $1.3 million
on annual pre-tax income and cash flow. The Company's fixed and variable long-
term debt at December 31, 1999 consisted of the following (dollars in
thousands):
LIBOR Sterling Bank Base
Fixed Plus LIBOR Rate
Year of Maturity Rate 2.5% Minus 1.5% Plus 2.0% Total
---------------- -------- -------- ---------- --------- --------
2000.................... $ 4,393 $ 875 $ 5,268
2001.................... 2,210 150 2,360
2002.................... 325 $2,965 3,290
2003.................... 11 $160,000 160,011
2004.................... 109 109
Thereafter(1)........... 190,045 190,045
-------- -------- ------ ------ --------
Total................. $197,093 $160,000 $2,965 $1,025 $361,083
======== ======== ====== ====== ========
Weighted Average
Interest Rate.......... 9.0% 8.5% 4.8% 10.5% 8.7%
======== ======== ====== ====== ========
- --------
(1) Includes Senior Subordinated Note.
Based on dealer's quotes, the estimated fair value of the Company's $175.0
million Senior Subordinated Note is $155.3 million. Estimated fair values for
other liabilities are not presented because the Company believes that they are
not materially different from book value, primarily because the majority of
the Company's remaining debt is based on variable rates that approximate terms
that the Company could obtain at December 31, 1999.
27
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Report of Independent Public Accountants................................. 29
Consolidated Balance Sheets at December 31, 1999 and 1998................ 30
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997..................................................... 31
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997..................................................... 32
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997........................................ 33
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1999, 1998 and 1997........................................ 33
Notes to Consolidated Financial Statements............................... 34
Quarterly Results of Operations and Other Financial Data (Unaudited)..... 55
FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts........................... 56
All other schedules are omitted because either they are not applicable, not
required or the information required is included in the Consolidated Financial
Statements, including the notes thereto.
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of CB Richard Ellis Services, Inc.:
We have audited the accompanying consolidated balance sheets of CB Richard
Ellis Services, Inc. (a Delaware corporation) as of December 31, 1999, and
1998, and the related consolidated statements of operations, stockholders'
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CB Richard Ellis Services,
Inc. as of December 31, 1999, and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commissions rules and is not a required part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
February 7, 2000
29
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
December 31
--------------------
1999 1998
--------- ---------
ASSETS
------
Current Assets:
Cash and cash equivalents............................... $ 27,844 $ 19,551
Receivables, less allowance of $15,560 and $13,348 for
doubtful accounts at December 31, 1999 and 1998........ 164,970 131,512
Deferred taxes, net..................................... 11,758 3,529
Prepaid expenses........................................ 8,370 13,459
Other current assets.................................... 25,057 8,353
--------- ---------
Total current assets.................................. 237,999 176,404
Property and equipment, net.............................. 70,149 58,366
Goodwill, net of accumulated amortization of $41,008 and
$25,060 at December 31, 1999 and 1998................... 445,010 445,124
Other intangible assets, net of accumulated amortization
of $279,156 and $268,497 at December 31, 1999 and 1998.. 57,524 63,913
Prepaid pension costs.................................... 26,323 28,241
Deferred taxes, net...................................... 28,190 23,100
Investment in and advances to unconsolidated
subsidiaries............................................ 36,545 31,633
Other assets............................................. 31,533 30,111
--------- ---------
Total assets.......................................... $ 933,273 $ 856,892
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Compensation and employee benefits...................... $ 113,518 $ 66,245
Accounts payable and accrued expenses................... 103,287 105,027
Reserve for bonus and profit sharing.................... 52,233 39,270
Current maturities of long-term debt.................... 5,268 12,343
Current portion of capital lease obligations............ 1,497 2,862
--------- ---------
Total current liabilities............................. 275,803 225,747
Long-term debt:
Revolving credit facility............................... 176,502 183,502
Senior subordinated notes, less unamortized discount of
$1,892 and $2,099 at December 31, 1999 and 1998........ 173,108 172,901
Other long-term debt.................................... 6,205 17,288
--------- ---------
Total long-term debt.................................. 355,815 373,691
Other long-term liabilities.............................. 88,046 60,737
--------- ---------
Total liabilities..................................... 719,664 660,175
Minority interest........................................ 3,872 5,875
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value; 8,000,000 shares
authorized; no shares issued or outstanding............
Common stock, $0.01 par value; 100,000,000 shares
authorized; 20,435,692 and 20,636,134 shares issued
and outstanding at December 31, 1999 and 1998.......... 213 211
Additional paid-in capital.............................. 355,893 349,796
Notes receivable from sale of stock..................... (8,087) (5,654)
Accumulated deficit..................................... (122,485) (145,767)
Accumulated other comprehensive (loss) income........... (1,928) 1,139
Treasury stock at cost, 885,100 and 488,900 shares at
December 31, 1999 and 1998............................. (13,869) (8,883)
--------- ---------
Total stockholders' equity............................ 209,737 190,842
--------- ---------
Total liabilities and stockholders' equity............ $ 933,273 $ 856,892
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
30
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
Year Ended December 31
---------------------------------
1999 1998 1997
---------- ---------- ----------
Revenue:
Leases.................................... $ 448,091 $ 371,300 $ 274,816
Sales..................................... 394,718 357,718 281,332
Property and facilities management fees... 110,111 86,379 39,208
Consulting and referral fees.............. 83,503 72,586 45,776
Appraisal fees............................ 61,116 48,082 22,460
Loan origination and servicing fees....... 40,564 39,402 27,120
Realty advisor fees....................... 28,929 33,145 27,566
Other..................................... 46,007 25,891 11,946
---------- ---------- ----------
Total revenue........................... 1,213,039 1,034,503 730,224
Costs and Expenses:
Commissions, fees and other incentives.... 536,277 458,463 364,403
Operating, administrative and other....... 559,393 448,794 275,749
Merger-related and other nonrecurring
charges.................................. - 16,585 12,924
Depreciation and amortization............. 40,470 32,185 18,060
---------- ---------- ----------
Operating income............................ 76,899 78,476 59,088
Interest income............................. 1,930 3,054 2,598
Interest expense............................ 39,368 31,047 15,780
---------- ---------- ----------
Income before provision for income tax...... 39,461 50,483 45,906
Provision for income tax.................... 16,179 25,926 20,558
---------- ---------- ----------
Income before extraordinary items........... 23,282 24,557 25,348
Extraordinary items, net.................... - - 951
---------- ---------- ----------
Net income.................................. $ 23,282 $ 24,557 $ 24,397
========== ========== ==========
Preferred stock dividend.................... $ - $ - $ 4,000
========== ========== ==========
Deemed dividend on preferred stock.......... $ - $ 32,273 $ -
========== ========== ==========
Earnings (loss) applicable to common
stockholders............................... $ 23,282 $ (7,716) $ 20,397
========== ========== ==========
Basic earnings (loss) per share............. $ 1.11 $ (0.38) $ 1.34
========== ========== ==========
Weighted average shares outstanding for
basic earnings (loss) per share............ 20,998,097 20,136,117 15,237,914
========== ========== ==========
Diluted earnings (loss) per share........... $ 1.10 $ (0.38) $ 1.28
========== ========== ==========
Weighted average shares outstanding for
diluted earnings (loss) per share.......... 21,072,436 20,136,117 15,996,929
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
31
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31
------------------------------
1999 1998 1997
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 23,282 $ 24,557 $ 24,397
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization excluding
deferred financing costs................... 40,470 32,185 18,060
Amortization of deferred financing costs.... 1,696 1,184 983
Extraordinary items, net.................... - - 951
Equity interest in (earnings) loss of
unconsolidated subsidiaries................ (7,528) (3,443) 113
Provision for litigation, doubtful accounts
and other.................................. 4,724 5,185 2,421
Deferred compensation....................... 28,843 14,738 6,121
Deferred taxes.............................. (12,688) 14,394 17,122
(Gain) loss on disposition of property and
businesses................................. (6,210) 2,058 -
Increase in receivables...................... (37,640) (24,846) (6,073)
Increase in compensation and employee
benefits payable............................ 37,339 7,782 19,772
Increase in accounts payable and accrued
expenses.................................... 1,346 2,615 2,903
Net change in other operating assets and
liabilities................................. 377 205 (5,935)
--------- --------- --------
Net cash provided by operating
activities............................... 74,011 76,614 80,835
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......... (35,130) (29,715) (9,927)
Proceeds from sale of inventoried property... 7,355 - -
Proceeds from sale of property and
businesses.................................. 11,410 - -
Proceeds from collections on notes
receivable.................................. 518 362 2,236
Increase in intangible assets and goodwill... (5,331) (14,595) (8,478)
Acquisition of businesses including net
assets acquired, intangibles and goodwill... (8,931) (189,895) 3,216
Other investing activities, net.............. 3,342 10,323 (5,065)
--------- --------- --------
Net cash used in investing activities..... (26,767) (223,520) (18,018)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior revolving credit line... - - 16,000
Repayment of senior revolving credit line.... - - (16,000)
Proceeds from revolving credit facility...... 165,000 315,000 155,000
Repayment of revolving credit facility....... (172,000) (268,000) (90,415)
Repayment of inventoried property loan....... (7,093) (377) -
Repayment of other loans..................... (12,402) (14,324) (55,976)
Proceeds from senior subordinated term loan.. - 172,788 -
Repayment of senior subordinated term loan... - - (65,872)
Payment of dividends payable................. - (5,000) -
Repurchase of preferred stock................ - (72,331) -
Repurchase of common stock................... (4,986) (8,883) -
Repayment of capital leases.................. (1,340) (1,655) (2,773)
Minority interest payments................... (3,801) (2,902) (1,990)
Other financing activities, net.............. (1,099) 5,122 (2,938)
--------- --------- --------
Net cash (used in) provided by financing
activities............................... (37,721) 119,438 (64,964)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................... 9,523 (27,468) (2,147)
Cash and cash equivalents, at beginning of
period........................................ 19,551 47,181 49,328
Effect of exchange rate changes on cash........ (1,230) (162) -
--------- --------- --------
Cash and cash equivalents, at end of period.... $ 27,844 $ 19,551 $ 47,181
========= ========= ========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest (none capitalized).................. $ 36,997 $ 27,528 $ 14,073
Income taxes................................. $ 12,689 $ 3,395 $ 2,736
Non-cash investing and financing activities:
Equipment acquired under capital leases...... $ - $ - $ 2,299
The accompanying notes are an integral part of these consolidated financial
statements.
32
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Notes Accumulated
Additional receivable other
Preferred Common paid-in from sale Accumulated comprehensive Treasury
stock stock capital of stock deficit income (loss) stock Total
--------- ------ ---------- ---------- ----------- ------------- -------- --------
Balance, December 31,
1996................... $ 40 $133 $198,026 $(5,109) $(194,721) $ 116 $ - $ (1,515)
Net income.............. - - - - 24,397 - - 24,397
Common stock issued for
incentive plans........ - - 2,996 (897) - - - 2,099
Earned compensation,
deferred compensation
plan................... - - 1,711 - - - - 1,711
Collection on stock
subscription notes..... - - - 50 - - - 50
Common stock issued for
Koll acquisition....... - 52 132,821 - - - - 132,873
Common stock options
exercised.............. - 3 2,427 - - - - 2,430
Preferred dividend
accrual................ - - (4,000) - - - - (4,000)
Foreign currency
translation loss....... - - - - - (274) - (274)
---- ---- -------- ------- --------- ------- -------- --------
Balance, December 31,
1997................... 40 188 333,981 (5,956) (170,324) (158) - 157,771
Net income.............. - - - - 24,557 - - 24,557
Common stock issued for
incentive plans........ - 1 4,163 (962) - - - 3,202
Earned compensation,
deferred compensation
plan................... - - 5,361 - - - - 5,361
Collection on, net of
cancellation of notes
receivable from
employee stock
incentive plan......... - - (646) 1,264 - - - 618
Common stock issued for
REI and
HP acquisitions........ - 15 58,486 - - - - 58,501
Common stock options
exercised.............. - 7 8,835 - - - - 8,842
Tax deduction from
exercise of stock
options................ - - 11,907 - - - - 11,907
Foreign currency
translation gain....... - - - - - 1,297 - 1,297
Purchase of preferred
stock.................. (40) - (72,291) - - - - (72,331)
Purchase of common
stock.................. - - - - - - (8,883) (8,883)
---- ---- -------- ------- --------- ------- -------- --------
Balance, December 31,
1998................... - 211 349,796 (5,654) (145,767) 1,139 (8,883) 190,842
Net income.............. - - - - 23,282 - - 23,282
Common stock issued for
incentive plans........ - 2 3,140 (2,534) - - - 608
Earned compensation,
deferred compensation
plan................... - - 1,669 - - - - 1,669
Collection on, net of
cancellation of notes
receivable from
employee stock
incentive plan......... - - - 101 - - - 101
Common stock options
exercised.............. - - 580 - - - - 580
Tax deduction from
exercise of stock
options................ - - 708 - - - - 708
Foreign currency
translation loss....... - - - - - (3,067) - (3,067)
Purchase of common
stock.................. - - - - - - (4,986) (4,986)
---- ---- -------- ------- --------- ------- -------- --------
Balance, December 31,
1999................... $ - $213 $355,893 $(8,087) $(122,485) $(1,928) $(13,869) $209,737
==== ==== ======== ======= ========= ======= ======== ========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Year ended December 31
------------------------
1999 1998 1997
------- ------- -------
Net income............................................ $23,282 $24,557 $24,397
Other comprehensive (loss) income..................... (3,067) 1,297 (274)
------- ------- -------
Comprehensive income.................................. $20,215 $25,854 $24,123
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements
33
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
CB Richard Ellis Services, Inc. ("CBRE Services" or "the Company") and its
consolidated subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
an original maturity of less than three months.
Goodwill and Other Intangible Assets
Net goodwill at December 31, 1999 consisted of $426.0 million related to the
1995 through 1999 acquisitions which is being amortized over an estimated
useful life of 30 years and $19.0 million related to the Company's original
acquisition in 1989 which is being amortized over an estimated useful life of
40 years.
Net other intangible assets at December 31, 1999 included approximately $7.9
million of deferred financing costs and $49.6 million of intangibles stemming
from the 1995 through 1999 acquisitions. These are amortized on a straight
line basis over the estimated useful lives of the assets, ranging from 3 to 15
years.
The Company periodically evaluates the recoverability of the carrying amount
of goodwill and other intangible assets. In this assessment, the Company
considers macro market conditions and trends in the Company's relative market
position, its capital structure, lender relationships and the estimated
undiscounted future cash flows associated with these assets. If any of the
significant assumptions inherent in this assessment materially change due to
market, economic and/or other factors, the recoverability is assessed based on
the revised assumptions and resultant undiscounted cash flows. If such
analysis indicates impairment, it would be recorded in the period such changes
occur based on the fair value of the goodwill and other intangible assets.
Income Recognition
Real estate commissions on sales are recorded as income upon close of escrow
or upon transfer of title. Real estate commissions on leases are generally
recorded as income upon the earlier of date of occupancy or cash receipt
unless significant future contingencies exist. Realty advisor incentive fees
are recognized when earned under the provisions of the related advisory
agreements. Other commissions and fees are recorded as income at the time the
related services have been performed unless significant future contingencies
exist.
Foreign Currencies
The currency effects of translating the financial statements of those non-US
subsidiaries of the Company which operate in local currency environments are
included in the "Accumulated other comprehensive income (loss) component of
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in results of operations and were not material in
each of the three years in the period ended December 31, 1999.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Accumulated other comprehensive income (loss) consists of foreign currency
translation adjustments.
34
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting for Transfers and Servicing
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments in accounting for loan sales and acquisition of servicing
rights. Under SFAS No. 125, the Company is required to recognize, at fair
value, financial and servicing assets it has acquired control over and related
liabilities it has incurred and amortize them over the period of estimated net
servicing income or loss. Write-off of the asset is required when control is
surrendered.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
at the date of the financial statements and the reported amounts of certain
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Management believes that these estimates provide a
reasonable basis for the fair presentation of its financial condition and
results of operations. The most significant estimates with regard to these
consolidated financial statements relate to deferred taxes and the useful life
of goodwill.
New Accounting Pronouncements
In 1999, the Company adopted Statement of Position 98-5, Reporting on the
Costs of Start-up Activities, which requires costs of start-up activities and
organization costs to be expensed as incurred. The adoption of this statement
did not have a material impact on the Company's financial statements.
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133, which deferred the
effective date of SFAS No. 133 for one year. SFAS No. 137 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
has not yet quantified the impacts of adopting SFAS No. 133 on its financial
statements and has not determined the timing of or method of its adoption of
SFAS No. 133. SFAS No. 133 is not anticipated to have any impact on earnings
or other components of comprehensive income as the Company had no derivatives
outstanding at December 31, 1999.
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the quarter ended December 31, 1998.
SFAS No. 131 requires the use of the "management approach" for segment
reporting, which is based on the way the chief operating decision maker
organizes segments within a company for making operating decisions and
assessing performance. The adoption of this statement did not have a material
impact on the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
Reclassifications
Certain reclassifications, which do not have an effect on net income, have
been made to the 1998 and 1997 financial statements to conform to the 1999
presentation.
35
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions
During 1999, the Company acquired four companies with an aggregate purchase
price of approximately $13.8 million. The two significant acquisitions were
Eberhardt Company which was acquired in September 1999 through L.J. Melody for
approximately $7 million and Profi Nordic which was acquired in February 1999
through CBRE Profi Acquisition Corp. (formerly Koll Tender III) for
approximately $5.5 million.
On October 20, 1998 the Company, through L.J. Melody, purchased Carey,
Brumbaugh, Starman, Phillips, and Associates, Inc., a regional mortgage
banking firm for approximately $5.6 million in cash and approximately $2.4
million in notes bearing interest at 9.0% with three annual payments which
began in October 1999. Approximately $0.2 million of the $2.4 million notes
was accounted for as deferred cash compensation to certain key executives. The
acquisition was accounted for as a purchase. The purchase price has largely
been allocated to intangibles and goodwill which are amortized on a straight
line basis over their estimated useful lives of 7 and 30 years, respectively.
On October 1, 1998 the Company purchased the remaining ownership interests
that it did not already own in the Richard Ellis Australia and New Zealand
businesses. The costs for the remaining interest was $20.0 million in cash.
Virtually all of the revenue of these locations is derived from brokerage and
appraisal services. The acquisition was accounted for as a purchase. The
purchase price has largely been allocated to intangibles and goodwill which
are amortized on a straight line basis over their estimated useful lives
ranging up to 30 years.
On September 22, 1998 the Company purchased the approximately 73.0% interest
that it did not already own in CB Commercial Real Estate Group of Canada, Inc.
The Company acquired the remaining interest for approximately $14.3 million in
cash. The acquisition was accounted for as a purchase. The purchase price has
been largely allocated to intangibles and goodwill which are amortized on a
straight line basis over their estimated useful lives ranging up to 30 years.
On July 7, 1998 the Company acquired the business of Hillier, Parker, May
and Rowden, now known as CB Hillier Parker Limited ("HP"), a commercial
property services partnership operating in the United Kingdom ("UK"). The
acquisition was accounted for as a purchase. The purchase price for HP
included approximately $63.6 million in cash and $7.1 million in shares of the
Company's common stock. In addition, the Company assumed a contingent payout
plan for key HP employees with a potential payout over three years of
approximately $13.9 million and assumed various annuity obligations of
approximately $15.0 million. The purchase price has largely been allocated to
goodwill which is amortized on a straight line basis over its estimated useful
life of 30 years.
On July 1, 1998 the Company increased its ownership percentage in CB
Commercial/Arnheim & Neely, an existing partnership formed in September 1996,
which then combined with the Galbreath Company Mid-Atlantic to form CB Richard
Ellis/Pittsburgh, LP. The total purchase price of the Company's 50% interest
in the combined enterprise is $5.7 million.
On May 31, 1998 the Company acquired Mathews Click and Associates, a
property sales, leasing, and management firm, for approximately $10.0 million
in cash and potential supplemental payments of $1.9 million which are
contingent upon operating results, payable to the sellers over a period of two
years. The acquisition was accounted for as a purchase. The total purchase
price including potential supplemental payments was allocated to intangibles
and goodwill which are amortized on a straight line basis over their estimated
useful lives of 7 and 30 years, respectively.
Effective May 1, 1998 the Company, through L.J. Melody, acquired Shoptaw-
James, Inc. ("Shoptaw-James"), a regional mortgage banking firm, for
approximately $6.3 million in cash and approximately
36
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$2.7 million in notes bearing interest at 9.0% with three annual payments
which began in May 1999. The acquisition was accounted for as a purchase.
Approximately $0.3 million of the $2.7 million notes are being accounted for
as compensation over the term of the notes as the payment of these notes are
contingent upon certain key executives' and producers' continued employment
with the Company. The approximate $2.4 million of the $2.7 million is being
accounted for as supplemental payments to the sellers over a period of three
years. The purchase price and supplemental payments have largely been
allocated to intangibles and goodwill which are amortized on a straight line
basis over their estimated useful lives of 7 and 30 years, respectively.
On April 17, 1998 the Company purchased all of the outstanding shares of CB
Commercial Limited, formerly known as REI Limited ("REI"), an international
commercial real estate services firm operating under the name Richard Ellis in
major commercial real estate markets worldwide (excluding the UK). The
acquisition was accounted for as a purchase. The purchase price has largely
been allocated to goodwill, which is amortized on a straight line basis over
an estimated useful life of 30 years. The purchase price for REI was
approximately $104.8 million of which approximately $53.3 million was paid in
cash and notes and approximately $51.5 million was paid in shares of the
Company's common stock. In addition, the Company assumed approximately
$14.4 million of long-term debt and minority interest. The Company incurred a
one-time charge of $3.8 million associated with the integration of REI's
operations and systems into the Company's.
On February 1, 1998 the Company, through L.J. Melody, acquired all of the
issued and outstanding stock of Cauble and Company of Carolina, a regional
mortgage banking firm for approximately $2.2 million, including cash payments
of approximately $1.8 million and a note payable of approximately $0.4 million
bearing interest at 9.0% with principal payments starting in April 1998. The
acquisition was accounted for as a purchase. The purchase price has been
largely allocated to intangibles and goodwill, which are amortized on a
straight line basis over their estimated useful lives of 7 and 30 years,
respectively.
On January 31, 1998 the Company, through L.J. Melody, acquired certain
assets of North Coast Mortgage Company, a regional mortgage banking firm for
cash payments of approximately $3.0 million and approximately $0.9 million in
notes. Approximately $0.3 million of the $0.9 million notes have been
accounted for as supplemental payments to the sellers and approximately $0.6
million as deferred compensation to certain key executives and producers
payable in three annual installments which began in February 1999. The
acquisition was accounted for as a purchase. The purchase price and
supplemental payments have largely been allocated to intangibles and goodwill,
which are amortized on a straight line basis over their estimated useful lives
of 7 and 30 years, respectively. The $0.6 million of deferred cash
compensation is being accounted for as compensation over the term of the
agreements as the payment of the compensation is contingent upon certain key
executives' and producers' continued employment with the Company.
On August 28, 1997 the Company purchased Koll Real Estate Services ("Koll")
through a merger. The acquisition was accounted for as a purchase and resulted
in the issuance of equity valued at approximately $132.9 million and the
assumption of debt and minority interest of approximately $57.4 million as of
August 28, 1997. The initial purchase price, in excess of the net identifiable
assets acquired, totaled $95.3 million, including $20.0 million relating to
incentive fees on investments fund partnerships which is earned as assets
within the funds are sold, and is included, net of amortization, in goodwill
and other intangible assets, respectively, in the accompanying consolidated
balance sheets. Goodwill is being amortized on a straight line basis over an
estimated useful life of 30 years. In the third quarter of 1997 the Company
recorded the effects of a charge for merger-related costs of $11.2 million,
which is included in total merger-related costs of $12.9 million.
The assets and liabilities of certain acquired companies, along with the
related goodwill, intangibles and indebtedness, are reflected in the
accompanying consolidated financial statements at December 31, 1999. The
results of operations of the acquired companies are included in the
consolidated results from the dates they were acquired. The unaudited pro
forma results of operations of the Company for the year ended December 31,
1998
37
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and 1997, assuming the REI acquisition, and the Koll acquisition, had occurred
on January 1, 1997, would have been as follows (amounts in thousands, except
per share data):
Year Ended December
31
--------------------
1998 1997
---------- --------
Revenue................................................ $1,051,114 $937,905
Net income (loss)...................................... 15,586 (2,433)
Net loss applicable to common stockholders............. (16,687) (6,433)
Loss per share
Basic................................................ (0.81) (0.32)
Diluted.............................................. (0.81) (0.32)
For the year ended December 31, 1998, net loss applicable to common
stockholders includes a deemed dividend of $32.3 million on the repurchase of
the Company's preferred stock. The pro forma results do not necessarily
represent results which would have occurred if the acquisitions had taken
place on the date assumed above, nor are they indicative of the results of
future combined operations. The amounts are based upon certain assumptions and
estimates, and do not reflect any benefit from economies which might be
achieved from combined operations. Further, REI historical results for the
first three months of 1998 include certain nonrecurring adjustments.
3. Other Current Assets
In December 1999, the Company sold five non-strategic offices and a small
insurance operation for a total of approximately $10 million. Other current
assets include $9.2 million in receivables from the sales at December 31, 1999
in the accompanying consolidated balance sheets.
4. Property and Equipment
Property and equipment is stated at cost and consists of the following (in
thousands):
December 31,
------------------
1999 1998
-------- --------
Land..................................................... $ - $ 1,822
Buildings and improvements............................... 19,273 14,844
Furniture and equipment.................................. 111,840 93,335
Equipment under capital leases........................... 29,800 30,939
-------- --------
160,913 140,940
Accumulated depreciation and amortization................ (90,764) (82,574)
-------- --------
Property and equipment, net............................ $ 70,149 $ 58,366
======== ========
The Company capitalizes expenditures that materially increase the life of
the related assets and charges the cost of maintenance and repairs to expense.
Upon sale or retirement, the capitalized costs and related accumulated
depreciation or amortization are eliminated from the respective accounts, and
the resulting gain or loss is included in operating income.
Depreciation is computed primarily using the straight line method over
estimated useful lives ranging from 3 to 10 years. Leasehold improvements are
amortized over the term of the respective leases, excluding options to renew.
Equipment under capital leases is depreciated over the related term of the
leases.
38
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company sold its headquarters building in downtown Los Angeles,
California, in September 1999 and its small office building in Phoenix,
Arizona in October 1999, both at a minimal loss. The Los Angeles building was
previously written down by $9.0 million to its estimated fair market value and
reclassified as property held for sale which is included in other assets at
December 31, 1998 in the accompanying consolidated balance sheets.
5. Investments in and Advances to Unconsolidated Subsidiaries
Investments in unconsolidated subsidiaries in which the Company does not
have majority control are accounted for under the equity method. Investments
in and advances to (from) unconsolidated subsidiaries as of December 31, 1999
and 1998 are as follows (in thousands):
December 31,
---------------
Interest 1999 1998
-------- ------- -------
CB Commercial/Whittier Partners, LP................ 50% $ 9,646 $ 9,691
CBRE Pittsburgh.................................... 50 5,853 5,822
KB Opportunity Investors........................... 45 5,274 12,570
Ikoma Corporation.................................. 20 2,523 -
KB Investors IV.................................... 45 2,347 2,738
Apollo KEERA LLC................................... 10 1,507 -
CBRE Corp Partners, LLC............................ 10 1,453 -
CB Commercial Real Estate Group Alberta............ 50 1,234 132
Premier Pacific Vineyards.......................... 15 1,001 1,001
Other.............................................. * 5,707 (321)
------- -------
$36,545 $31,633
======= =======
- --------
* Various interests with varying ownership rates.
Unaudited combined condensed financial information for the entities
accounted for using the equity method is as follows (in thousands):
Condensed Statement of Operations Information:
Year Ended December 31,
------------------------
1999 1998 1997
-------- ------- -------
Net revenue........................................ $113,489 $72,911 $59,304
Income from operations............................. 27,537 27,921 20,398
Net income......................................... 21,547 23,678 27,618
Condensed Balance Sheet Information:
December 31,
----------------
1999 1998
-------- -------
Current assets............................................. $ 37,594 $40,492
Noncurrent assets.......................................... 152,755 45,686
Current liabilities........................................ 24,176 11,123
Noncurrent liabilities..................................... 82,828 20,274
Equity interest in earnings (losses) of the unconsolidated subsidiaries of
$7,528,000, $3,443,000 and $(113,000) for the years ended December 31, 1999,
1998 and 1997, respectively, have been included in "Operating, Administrative
and Other" in the Consolidated Statements of Operations.
39
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Other Assets
Included in other assets at December 31, 1999 in the consolidated balance
sheets are $20.4 million invested in cash surrender value of insurance
products and which function like mutual funds as an investment alternative for
the Deferred Compensation Plan (see Note 7). Also included in other assets are
$4.9 million of notes receivable from stock options exercised (see Note 10).
At December 31, 1998, other assets included $5.3 million of notes receivable
from stock options exercised, $8.0 million of property held for sale and $7.4
million of inventoried property which were sold in 1999.
7. Employee Benefit Plans
Option Plans. In conjunction with the Shoptaw-James acquisition, options for
25,000 shares were granted with an exercise price representing a fair market
value of $37.32 per share on the date of grant. On December 15, 1998 the
option holders elected to change the exercise price to $20.00 per share, which
was above market value on the date of election, and simultaneously reduce the
number of shares by 20%. The options vest over five years at a rate of 20% per
year, expiring in May 2008. Options for 20,000 shares were outstanding at
December 31, 1999.
In April 1998, in conjunction with the REI acquisition, the Company approved
the assumption of the options outstanding under the REI Limited Stock Option
Plan. These options for 46,115 shares of common stock were issued and
exercised immediately at $14.95 per share in exchange for existing REI
options. Also in conjunction with the REI acquisition, the Company granted
options for 475,677 shares at an exercise price equal to fair market value at
date of grant of $33.50 per share. On December 15, 1998 certain holders of a
stock option grant elected to change the exercise price of their options to
$20.00 per share, which was above market value on the date of election, and
simultaneously reduce the number of shares by 20%. These options vest over
three years at a rate of 33.33% per year, expiring in March 2009. Options for
499,286 shares were outstanding at December 31, 1999.
In conjunction with the NCMC acquisition, options for 25,000 shares were
granted with an exercise price representing the fair market value at date of
grant of $32.50. On December 15, 1998, the option holders elected to change
the exercise price to $20.00 per share, which was above market value on the
date of election, and simultaneously reduce the number of shares by 20%. The
options vest over five years at a rate of 20% per year, expiring in February
2008. Options for 20,000 shares were outstanding at December 31, 1999.
A total of 700,000 shares of common stock have been reserved for issuance
under the Company's 1997 Employee Stock Option Plan. On December 15, 1998,
certain holders of stock option grants with an exercise price in excess of
$20.00 per share elected to change the exercise price of their options to
$20.00 per share, which was above market value on the date of election and
simultaneously reduce the number of shares by 20%. During 1999, the Company
granted options for 289,000 shares of common stock at an exercise price
ranging from $14.25 to $16.38 per share. All options were granted at an
exercise price equal to fair market value at date of grant. The vesting
periods for these options range from approximately one to five years, expiring
at various dates through 2009. Options for 647,160 shares were outstanding at
December 31, 1999.
In August 1997, in conjunction with the Koll acquisition, the Company
approved the assumption of the options outstanding under the KMS Holding
Company Amended 1994 Stock Option Plan (now known as the CBC Substitute Option
Plan ("CBCSP")) and the Koll Acquisition Stock Option Plan ("KASOP"). Under
the CBCSP, 407,087 stock options were issued with exercise prices ranging from
$12.89 to $18.04 in exchange for existing Koll options. These options were
immediately exercisable. At December 31, 1999, 158,072 options have been
exercised and 249,015 options were outstanding. Under the KASOP, 550,000 stock
options were issued to former senior executives of Koll who became employees
or directors of the Company. These options have
40
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exercise prices ranging from $14.25 to $36.75 per share and vesting periods
ranging from immediate to three years, expiring at various dates through
September 2009. Options for 300,000 shares were outstanding at December 31,
1999.
A total of 90,750 shares of common stock have been reserved for issuance
under the L.J. Melody Acquisition Stock Option Plan, which was adopted by the
Board of Directors in September 1996 as part of the July 1996 acquisition of
L.J. Melody. Options for all such shares have been issued at an exercise price
of $10.00 per share and vest over a period of five years at the rate of 5% per
quarter expiring in June 2006. Options for 90,750 shares of common stock were
outstanding at December 31, 1999.
A total of 600,000 shares of common stock have been reserved for issuance
under the Company's 1991 Service Providers Stock Option Plan. In various years
below market options were granted to certain directors as partial payment for
director fees. On December 15, 1998 certain holders of stock option grants
with an exercise price in excess of $20.00 per share elected to change the
exercise price of their options to $20.00 per share, which was above market
value on the date of election and simultaneously reduce the number of shares
by 20%. During 1999, options for 87,000 shares were granted to certain
directors and executive officers at an exercise price equal to fair market
value at date of grant ranging from $14.25 to $18.13 per share. All options
vest over one to five year periods, expiring at various dates through
September 2009. Options for 569,178 shares were outstanding at December 31,
1999.
A total of 1,000,000 shares of common stock have been reserved for issuance
under the Company's 1990 Stock Option Plan. All options vest over one to four
year periods, expiring at various dates through November 2006. During 1999 and
1998, options to purchase 58,000 shares and 668,250 shares of common stock
were exercised, respectively. Options for 55,000 shares were outstanding at
December 31, 1999.
As allowed under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company has elected to follow Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its employee stock based compensation plans.
Under this method the Company does not recognize compensation expense for
options that were granted at or above the market price of the underlying stock
on the date of grant. Had compensation expense been determined consistent with
SFAS No. 123, the Company's net income and per share information would have
been reduced to the following pro forma amounts (in thousands except per share
data):
1999 1998 1997
------- ------- -------
Net Income:
As Reported....................................... $23,282 $24,557 $24,397
Pro Forma......................................... 19,039 20,396 21,940
Basic EPS:
As Reported....................................... 1.11 (0.38) 1.34
Pro Forma......................................... 0.91 (0.59) 1.18
Diluted EPS:
As Reported....................................... 1.10 (0.38) 1.28
Pro Forma......................................... 0.91 (0.59) 1.12
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997, respectively: risk-free
interest rates of 5.55%, 4.95% and 6.54% for the various plans. Expected
volatility for 1999, 1998, and
41
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997, respectively, is 61.83%, 48.16% and 36.67%. Dividend yield is excluded
from the calculation since it is the present intention of the Company to
retain all earnings for future acquisitions. Expected life for 1999, 1998 and
1997 is 5.00, 5.00 and 5.15 years, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, the Company believes the Black-Scholes model does not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
A summary of the status of the Company's option plans at December 31, 1999,
1998, and 1997 and changes during the years then ended is presented in the
table and narrative below:
1999 1998 1997
------------------- --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Stock Options and Exercise Exercise Exercise
Warrants Shares Price Shares Price Shares Price
----------------- --------- -------- ----------- -------- --------- --------
Outstanding beginning of
the year............... 2,937,085 $23.18 3,284,381 $22.43 1,116,890 $10.32
Granted................. 628,611 15.17 1,885,944 25.94 2,392,554 26.99
Exercised............... (58,000) 10.00 (824,385) 10.73 (225,063) 10.78
Forfeited/Expired....... (432,340) 31.64 (1,408,855) 32.42 - -
--------- ------ ----------- ------ --------- ------
Outstanding end of
year................... 3,075,356 $20.71 2,937,085 $23.18 3,284,381 $22.43
--------- ------ ----------- ------ --------- ------
Exercisable at end of
year................... 770,756 $21.86 830,289 $21.94 1,412,800 $16.08
Weighted average fair
value of options and
warrants granted....... $8.84 $12.27 $14.27
Significant option and warrant groups outstanding at December 31, 1999 and
related weighted average price and life information is presented below:
Exercisable Options
Outstanding Options and Warrants and Warrants
------------------------------------- --------------------
Weighted Weighted
Weighted Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- -------- ----------- --------
$00.30-$10.00.... 139,928 5.52 yrs. $ 7.71 108,909 $ 7.06
$12.89-$19.44.... 842,515 8.20 yrs. 14.93 258,015 14.24
$20.00-$23.75.... 1,398,112 7.82 yrs. 20.58 385,632 20.86
$30.00-$37.31.... 694,801 5.15 yrs. 30.60 18,200 34.34
--------- ------ ------- ------
3,075,356 $20.71 770,756 $17.01
========= ====== ======= ======
Stock Purchase Plans. The Company has restricted stock purchase plans
covering certain key executives including senior management. A total of
500,000 and 550,000 shares of common stock have been reserved for issuance
under the Company's 1999 and 1996 Equity Incentive Plans, respectively. The
shares may be issued to senior executives for a purchase price equal to the
greater of $18.00 and $10.00 per share or fair market value,
42
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively. Under these plans, 140,833 and 506,286 shares were outstanding
at December 31, 1999, respectively. The purchase price for these shares must
be paid either in cash or by delivery of a full recourse promissory note. The
related promissory notes are also included in the consolidated statements of
stockholders' equity.
Bonuses. The Company has bonus programs covering certain key employees,
including senior management. Awards are based on the position and performance
of the employee and the achievement of pre-established financial, operating
and strategic objectives. The amounts charged to expense for bonuses were
$44.3 million, $33.7 million, and $28.8 million for the years ended December
31, 1999, 1998, and 1997, respectively.
Capital Accumulation Plan (the "Cap Plan"). The Cap Plan is a defined
contribution profit sharing plan under Section 401(k) of the Internal Revenue
Code and is the Company's only such plan. Under the Cap Plan, each
participating employee may elect to defer a portion of his or her earnings and
the Company may make additional contributions from the Company's current or
accumulated net profits to the Cap Plan in such amounts as determined by the
Board of Directors. The Company expensed, in connection with the Cap Plan,
$1.6 million and $2.9 million for the years ended December 31, 1999 and 1997.
No expense, in connection with the Cap Plan, was incurred for the year ended
December 31, 1998.
Deferred Compensation Plan (the "DCP"). In 1994 the Company implemented the
DCP. Under the DCP, a select group of management and highly compensated
employees can defer the payment of all or a portion of their compensation
(including any bonus). The DCP permits participating employees to make an
irrevocable election at the beginning of each year to receive amounts deferred
at a future date either in cash, which is an unsecured long-term liability of
the Company, or in newly issued shares of common stock of the Company which
elections are recorded as additions to stockholders' equity. Effective May 1,
1999, the Company revised the DCP to add insurance products which function
like mutual funds as an investment alternative and to fund the Company's
obligation for deferrals invested in such insurance products. The Company
received proceeds of approximately $1.6 million related to additional
insurance products. For the twelve months ended December 31, 1999,
approximately $31.4 million and $1.7 million were deferred in cash (including
interest and capital appreciation) and stock, respectively. The accumulated
deferrals net of disbursements at December 31, 1999, were approximately $47.2
million in cash (including interest and capital appreciation) and $11.7
million in stock of which $9.3 million are not yet issued for a total of $58.9
million, all of which was charged to expense in the period of deferral and
classified as other long-term liabilities, except for stock which is included
in stockholders' equity.
Pension Plan. The Company, through the acquisition of HP, maintains a
contributory defined benefit pension plan to provide retirement benefits to
former HP employees participating in the plan. It is the Company's policy to
fund the minimum annual contributions required by applicable regulations.
Pension expense totaled $1,889,000 and $909,000 in 1999 and 1998,
respectively.
43
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth a reconciliation of benefit obligation, plan assets,
plan's funded status and amounts recognized in the accompanying consolidated
balance sheets:
Year Ended December 31
------------------------
1999 1998
----------- -----------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year............. $ 73,190 $ 64,903
Service cost........................................ 5,350 2,474
Interest cost....................................... 4,175 2,061
Plan participants' contributions.................... 804 289
Actuarial (gain) loss............................... (7,495) 3,723
Benefits paid....................................... (1,760) (1,133)
Currency (gain) loss................................ (2,118) 873
----------- ----------
Benefit obligation at end of year................... $ 72,146 $ 73,190
=========== ==========
Change in plan assets
Fair value of plan assets at beginning of year...... $ 95,731 $ 93,970
Actual return on plan assets........................ 22,666 1,270
Company contributions............................... 786 202
Plan participants' contributions.................... 419 107
Benefits paid....................................... (1,760) (1,133)
Currency (loss) gain................................ (2,803) 1,315
----------- ----------
Fair value of plan assets at end of year............ $ 115,039 $ 95,731
=========== ==========
Funded status....................................... $ 42,893 $ 22,541
Unrecognized net actuarial (loss) gain.............. (16,570) 5,700
----------- ----------
Prepaid benefit cost................................ $ 26,323 $ 28,241
=========== ==========
Weighted-average assumptions used in developing the projected benefit
obligation were as follows:
December
31
----------
1999 1998
---- ----
Discount rate.................................................... 5.75% 6.00%
Expected long-term rate of return on plan assets................. 7.75% 7.75%
Annual increase in future compensation levels.................... 5.00% 5.50%
Net periodic pension cost consisted of the following:
Year Ended December 31
------------------------
1999 1998
----------- -----------
(In thousands)
Employer service cost.............................. $ 5,350 $ 2,474
Interest cost on projected benefit obligation...... 4,175 2,061
Expected return on plan assets..................... (7,636) (3,626)
----------- -----------
Net periodic benefit cost.......................... $ 1,889 $ 909
=========== ===========
44
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Long-term Debt
Long-term debt consists of the following (in thousands):
December 31
-----------------
1999 1998
-------- --------
Senior Subordinated Notes, less unamortized discount of
$1,892 million in 1999 and $2,099 million in 1998, with
fixed interest at 8.9% due in 2006...................... $173,108 $172,901
Revolving Credit Facility, with interest ranging from
8.1% to 9.5%............................................ 160,000 167,000
Westmark Senior Notes, with interest ranging from 10.0%
to 12.0% through December 31, 2004 and at variable rates
depending on the Company's credit facility rate
thereafter, $2,546 million due in 2008, with the
remaining balance due in 2010........................... 16,502 16,502
REI Acquisition Obligations, payable in Sterling pounds
and Spanish pesetas, with interest ranging from 6.8% to
8.8%, due in 2002....................................... 772 7,575
Inventoried Property loan, secured by inventoried
property, with interest at short-term commercial paper
borrowing rate plus 3.5% (8.3% at December 31, 1998).... - 7,093
REI Senior Notes with variable interest rates based on
Sterling LIBOR minus 1.5% due in 2002................... 2,965 5,439
Shoptaw-James Senior Notes, with fixed interest at 9.0%,
due from 2000 through 2002.............................. 1,620 2,430
Carey, Brumbaugh Senior Notes, with fixed interest at
9.0%, due from 2000 through 2001........................ 1,440 2,160
Koll Acquisition Obligations, with interest ranging up to
10.5%, due in 2001...................................... 1,190 1,469
Eberhardt Acquisition Obligations, with fixed interest at
8.0%, due from 2000 through 2002........................ 900 -
Other.................................................... 2,586 3,465
-------- --------
Total.................................................. 361,083 386,034
Less current maturities................................ 5,268 12,343
-------- --------
Total long-term debt................................... $355,815 $373,691
======== ========
Annual aggregate maturities of long-term debt at December 31, 1999 are as
follows (in thousands): 2000-- $5,268; 2001--$2,360; 2002--$3,290; 2003--
$160,011; 2004--$109; and $190,045 thereafter.
In May 1998, the Company amended its revolving credit facility with a group
of banks to provide up to $400.0 million for five years, subject to mandatory
reductions of $40.0 million, $80.0 million and $80.0 million on December 31,
1999, 2000 and 2001, respectively. Subsequently, in October 1999, the Company
executed an amendment to the revolving credit facility, reducing the facility
to $350.0 million, eliminating the mandatory reduction on December 31, 1999,
and revising some of the restrictive covenants. The new amendment is also
subject to mandatory reductions of the facility by $80.0 million and $70.0
million on December 31, 2000 and 2001, respectively. The amount outstanding
under this facility was $160.0 million at December 31, 1999. Interest rate
alternatives include Bank of America's reference rate plus 1.00% and LIBOR
plus 2.50%. The weighted average rate on amounts outstanding at December 31,
1999 was 8.45%.
The revolving credit facility contains numerous restrictive covenants that,
among other things, limit the Company's ability to incur or repay other
indebtedness, make advances or loans to subsidiaries and other entities, make
capital expenditures, incur liens, enter into mergers or effect other
fundamental corporate transactions, sell
45
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
its assets, or declare dividends. In addition, the Company is required to meet
certain ratios relating to its adjusted net worth, level of indebtedness,
fixed charges and interest coverage.
In May 1998, the Company sold $175.0 million of 8.875% Senior Subordinated
Notes ("Subordinated Notes") due on June 1, 2006. The Subordinated Notes are
redeemable in whole or in part after June 1, 2002 at 104.438% of par on that
date and at declining prices thereafter. On or before June 1, 2001, up to
35.0% of the issued amount may be redeemed at 108.875% of par plus accrued
interest solely with the proceeds from an equity offering.
The Company has a credit agreement with Chase Bank of Texas, National
Association. The credit agreement provides for a revolving line of credit,
which bears interest at 1.0% in excess of the yield equivalent (expressed as a
percentage rate per annum) of the bank's cost of funds. The Company may borrow
$20,000,000 under the line of credit until May 28, 2000, when the revolving
line of credit expires. At December 31, 1999, the Company had no revolving
line of credit principal outstanding.
The Company has a credit agreement with Bank One Texas, National
Association. The credit agreement provides for an investment line of credit,
which bears interest at a varying rate per annum equal to the lesser of (a)
the maximum nonusurious interest rate or (b) 0.35% for the equivalent amount
for the monthly period. The Company may borrow $30,000,000 under the
investment line of credit until July 31, 2000, when the investment line of
credit expires. At December 31, 1999, the Company had no investment line-of-
credit principal outstanding.
In September 1999, with the acquisition of Eberhardt Company, the Company
entered into a credit agreement with U.S. Bank National Association. The
credit agreement provides for a revolving line of credit, which bears interest
at 2.0% (fixed rate) per annum and a working capital facility in which
interest will be paid at a rate equal to the floating LIBOR plus 2.125% per
annum. The Company may borrow $8,500,000 under the revolving line of credit
and $300,000 under the working capital facility until June 30, 2000, when the
revolving line of credit and working capital facilities expire. At December
31, 1999, the Company had no revolving line of credit or working capital
facility principal outstanding
The Company has a credit agreement with Residential Funding Corporation
(RFC). The credit agreement provides for a revolving line of credit, which
bears interest at 1.25% per annum over LIBOR. The Company may borrow
$50,000,000 under the revolving line of credit until August 31, 2000, when the
revolving line of credit expires. At December 31, 1999, the Company had no
revolving line of credit outstanding.
9. Commitments and Contingencies
In December 1996, GMH Associates, Inc. ("GMH") filed a lawsuit against
Prudential Realty Group ("Prudential") and the Company in Superior Court of
Pennsylvania, Franklin County, alleging various contractual and tort claims
against Prudential, the seller of a large office complex, and the Company, its
agent in the sale, contending that Prudential breached its agreement to sell
the property to GMH, breached its duty to negotiate in good faith, conspired
with the Company to conceal from GMH that Prudential was negotiating to sell
the property to another purchaser and that Prudential and the Company
misrepresented that there were no other negotiations for the sale of the
property. Following a non-jury trial, the court rendered a decision in favor
of GMH and against Prudential and the Company, awarding GMH $20.3 million in
compensatory damages, against Prudential and the Company jointly and
severally, and $10.0 million in punitive damages, allocating the punitive
damage award $7.0 million as against Prudential and $3.0 million as against
the Company. Following the denial of motions by Prudential and the Company for
a new trial, a judgment was entered on December 3, 1998. Prudential and the
Company filed an appeal of the judgment. On March 3, 2000 the appellate court
in Pennsylvania reversed all of the trial courts' decisions finding that
liability was not supported on any theory
46
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
claimed by GMH and directed that a judgement be entered in favor of the
defendants including the Company. The plaintiff has filed an appeal with the
Pennsylvania Supreme Court.
In August 1993, a former commissioned sales person of the Company filed a
lawsuit against the Company in the Superior Court of New Jersey, Bergen
County, alleging gender discrimination and wrongful termination by the
Company. On November 20, 1996, a jury returned a verdict against the Company,
awarding $1.5 million in general damages and $5.0 million in punitive damages
to the plaintiff. Subsequently, the trial court awarded the plaintiff $638,000
in attorneys' fees and costs. Following denial by the trial court of the
Company's motions for new trial, reversal of the verdict and reduction of
damages, the Company filed an appeal of the verdict and requested a reduction
of damages. On March 9, 1999 the appellate court ruled in the Company's favor,
reversed the trial court decision and ordered a new trial. On February 16,
2000 the Supreme Court of New Jersey reversed the decision of the appellate
court, concluded that the general damage award in the trial court should be
sustained and returned the case to the appellate court for a determination as
to whether a new trial should be ordered on the issue of punitive damages.
Based on available reserves, cash and anticipated cash flows, the Company
believes that the ultimate outcome of this case will not have an impact on the
Company's ability to carry on its operations.
The Company is a party to a number of pending or threatened lawsuits arising
out of, or incident to, its ordinary course of business. Based on available
cash and anticipated cash flows, the Company believes that the ultimate
outcome will not have an impact on the Company's ability to carry on its
operations. Management believes that any liability to the Company that may
result from disposition of these lawsuits will not have a material effect on
the consolidated financial position or results of operations of the Company.
Future minimum rental commitments for noncancelable operating leases at
December 31, 1999, are as follows (in thousands): 2000--$44,008; 2001--
$40,021; 2002--$32,426; 2003--$25,670; 2004--$18,987 and $100,555 thereafter.
Future minimum lease commitments for noncancelable capital leases which are
mainly computer leases with three-year commitments at December 31, 1999 are as
follows (in thousands): 2000--$1,497; 2001--$1,243 and 2002--$669; 2003--$548;
2004--$ -- and $ -- thereafter. The interest portion of the lease payments
totals approximately $0.9 million. Capital lease payments due within one year
are classified as current liabilities.
Substantially all leases require the Company to pay maintenance costs,
insurance and property taxes, and generally may be renewed for five year
periods. Total rental expense under noncancelable operating leases was $50.5
million, $32.4 million and $24.3 million for the years ended December 31,
1999, 1998 and 1997, respectively.
During the year ended December 31, 1999, the Company entered into an
agreement with Fannie Mae in which the Company agreed to fund the purchase of
a $103.6 million loan portfolio from proceeds from its RFC line of credit,
which was temporarily increased to $135.0 million. A 100% participation in
this loan portfolio was subsequently sold to Fannie Mae with the Company
retaining the credit risk on the first 2% of loss incurred on the underlying
portfolio of commercial mortgage loans. The Company has collateralized its
obligation to cover the first 2% of losses by pledging a letter of credit in
the amount of $1.0 million to Fannie Mae.
The Company has a participation agreement with RFC whereby RFC agrees to
purchase a 99% participation interest in any eligible multifamily mortgage
loans owned by the Company and outstanding at quarter-end. The participation
agreement expires August 31, 2000.
47
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity
In 1999, the Company issued 140,833 shares to certain key executives in
connection with the 1999 Equity Incentive Plan and 58,000 shares in connection
with stock option plans.
In connection with an on-going stock repurchase program, the Company
purchased 396,200 shares of common stock for approximately $5.0 million in
1999 and 488,900 shares of common stock for approximately $8.9 million in
1998.
In October 1998, the Company offered all employees under the 1990 Stock
Option Plan who hold options that expired in April 1999 a loan equal to 100%
of the total exercise price plus 40% of the difference between the current
market value of the shares and the exercise price. Loan proceeds were applied
towards the total exercise price and payroll withholding taxes. The loans are
evidenced by full recourse promissory notes having a maturity of five years at
an interest rate of 6.0%. Interest is due annually, while the principal is due
the earlier of five years or upon sale of the shares. The shares issued under
this offering may not be sold until after 18 months from the date of issuance.
A total of 415,000 shares were issued under this offering. The related
promissory notes of $4.9 million and $5.3 million are included in other assets
in the consolidated balance sheets at December 31, 1999 and 1998,
respectively.
In 1998, the Company issued 1,328,638 shares of common stock in the REI
acquisition, 208,263 shares of common stock in the HP acquisition, 25,000
shares to a certain key employee in connection with the 1996 Equity Incentive
Plan, 75,064 shares with a stated value of approximately $2.9 million to the
Cap Plan for the year ended December 31, 1997 and 824,385 shares in connection
with stock option plans.
On January 27, 1998 the Company purchased all 4.0 million of its existing
convertible preferred shares which could have been converted into
approximately 2.56 million common shares, based on the Company's prevailing
stock price on that date. The preferred shares carried a dividend requirement
of $.35 per share per quarter. The total cost to purchase the preferred shares
was $77.4 million, including $5.0 million of previously accrued dividends and
certain stock options. The shares were originally issued in conjunction with
the Company's acquisition by management in 1989.
In August 1997 in conjunction with the Koll acquisition, the Company
approved the issuance of 599,967 warrants. Of the outstanding warrants, 43,644
are attached to common stock obtainable under the CBC Substitute Option Plan
and 556,323 are attached to shares of outstanding common stock. Each warrant
is exercisable into one share of common stock at an exercise price of $30.00
(subject to adjustment) commencing on August 28, 2000 and expiring on August
27, 2004. At December 31, 1999, 599,967 warrants issued were outstanding.
11. Income Taxes
The provisions for income taxes for the years ended December 31, 1999, 1998
and 1997 were computed in accordance with SFAS 109, the modified liability
method of accounting for income taxes.
The foreign currency translation adjustments included in accumulated other
comprehensive income were net of an income tax (benefit) provision of
$(458,000), $829,000 and $(175,000) in 1999, 1998 and 1997, respectively.
48
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax provision (benefit) for the years ended December 31, 1999, 1998 and
1997 consisted of the following (in thousands):
Year Ended December 31
-------------------------
1999 1998 1997
------- ------- -------
Federal:
Current............................................ $14,403 $ 4,265 $ 1,243
Deferred tax....................................... (1,417) 14,469 17,436
Reduction of valuation allowances.................. (6,347) - -
------- ------- -------
6,639 18,734 18,679
State:
Current............................................ 5,627 3,470 2,193
Deferred tax....................................... (1,411) (75) (314)
------- ------- -------
4,216 3,395 1,879
Foreign:
Current............................................ 8,837 3,797 -
Deferred tax....................................... (3,513) - -
------- ------- -------
5,324 3,797 -
------- ------- -------
$16,179 $25,926 $20,558
======= ======= =======
The following is a reconciliation, stated as a percentage of pre-tax income,
of the US statutory federal income tax rate to the Company's effective tax
rate on income from operations:
Year Ended December 31
----------------------
1999 1998 1997
------- ------- ----
Federal statutory tax rate.................. 35% 35% 35%
Permanent differences, including goodwill,
meals and entertainment.................... 15 8 7
State taxes, net of federal benefit......... 9 4 2
Foreign income taxes........................ 4 4 -
Reduction of valuation allowances........... (22) - 1
------- ------- -------
Effective tax rate.......................... 41% 51% 45%
======= ======= =======
49
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cumulative tax effects of temporary differences are shown below at December
31, 1999 and 1998 (in thousands):
December 31
------------------
1999 1998
-------- --------
Asset (Liability)
Property and equipment................................. $ 5,820 $ 4,325
Reserves for bad debts, building write-down, legal
expenses.............................................. 15,940 16,410
Intangible amortization................................ (16,533) (14,998)
Bonus, unexercised restricted stock, deferred
compensation.......................................... 23,990 13,282
Partnership income..................................... 7,092 4,877
Net operating loss and alternative minimum tax credit
carryforwards......................................... 23,086 28,049
Unconsolidated affiliates.............................. (1,167) (141)
All other, net......................................... 2,040 1,492
-------- --------
Net deferred tax asset before valuation allowances..... 60,268 53,296
Valuation allowances................................... (20,320) (26,667)
-------- --------
Net deferred tax asset............................... $ 39,948 $ 26,629
======== ========
The Company had federal income tax NOLs of approximately $57.4 million at
December 31, 1999, corresponding to $20.1 million of the Company's $60.3
million in net deferred tax assets before valuation allowances, which expire
in the years 2004 to 2008.
The ability of the Company to utilize NOLs was limited in 1998 and will be
in subsequent years as a result of the Company's 1996 public offering, the
1997 Koll acquisition and the 1998 repurchase of preferred stock which
cumulatively caused a more than 50.0% change of ownership within a three year
period. As a result of the limitation, the Company will be able to use
approximately $26.0 million of its NOL in 1999 and in each subsequent year.
The amount of NOLs is, in any event, subject to some uncertainty until the
statute of limitation lapses.
A deferred US tax liability has not been provided on the unremitted earnings
of foreign subsidiaries because it is the intent of the Company to permanently
reinvest such earnings. Undistributed earnings of foreign subsidiaries, which
have been or are intended to be permanently invested in accordance with APB
No. 23, Accounting for Income Taxes--Special Areas, aggregated $11.0 million
at December 31, 1999.
12. Per Share Information
Basic earnings (loss) per share was computed by dividing net income (loss),
less preferred dividend requirements as applicable, by the weighted average
number of common shares outstanding during each period. The computation of
diluted earnings (loss) per share further assumes the dilutive effect of stock
options, stock warrants and, during periods when preferred stock was
outstanding and was dilutive, the conversion of the preferred stock. When the
Company is in a net loss position for a particular reporting period, the stock
options and warrants outstanding are excluded as they are anti-dilutive.
In January 1998 the Company repurchased all 4.0 million of its existing
convertible preferred stock. The portion of the purchase price in excess of
the carrying value represents the deemed dividend charge to net income
applicable to common shareholders when computing basic and dilutive earnings
(loss) per share for the year ended December 31, 1998.
50
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a calculation of earnings (loss) per share for the years
ended December 31 (in thousands, except share and per share data):
1999 1998 1997
------------------------- --------------------------- --------------------------
Per- Per- Per-
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
------- ---------- ------ -------- ---------- ------ ------- ---------- ------
Basic earnings (loss)
per share
Net income before
extraordinary items... $23,282 $ 24,557 $25,348
Deemed dividend on
preferred stock
repurchase............ - (32,273) -
Preferred stock
dividends............. - - (4,000)
------- -------- -------
Income before
extraordinary items
applicable to common
shareholders.......... 23,282 $1.11 (7,716) $(0.38) 21,348 $ 1.40
Extraordinary items,
net................... - - - - (951) (0.06)
------- ----- -------- ------ ------- ------
Earnings (loss)
applicable to common
shareholders.......... $23,282 20,998,097 $1.11 $ (7,716) 20,136,117 $(0.38) $20,397 15,237,914 $ 1.34
======= ========== ===== ======== ========== ====== ======= ========== ======
Diluted earnings (loss)
per share
Income before
extraordinary items
applicable to common
shareholders.......... $23,282 20,998,097 $ (7,716) 20,136,117 $21,348 15,237,914
Diluted effect of
exercise of options
outstanding........... 74,339 - - 759,015
------- ---------- -------- ---------- ------- ----------
Income before
extraordinary items
applicable to common
shareholders.......... $23,282 $1.10 (7,716) $(0.38) 21,348 $ 1.34
Extraordinary items,
net................... - - - - (951) - (0.06)
------- ----- -------- ------ ------- ---------- ------
Earnings (loss)
applicable to common
shareholders.......... $23,282 21,072,436 $1.10 $ (7,716) 20,136,117 $(0.38) $20,397 15,996,929 $ 1.28
======= ========== ===== ======== ========== ====== ======= ========== ======
The following items were not included in the computation of diluted earnings
per share because their effect in the aggregate was anti-dilutive for the years
ended December 31:
1999 1998 1997
-------------- --------------- ----------------
Stock options
Outstanding.................. 2,008,659 2,337,118 845,500
Price ranges................. $16.38-$ 36.75 $0.30-$37.31 $31.00-$36.75
Expiration ranges............ 6/8/04-5/31/09 4/18/99-7/22/08 4/21/07-11/17/07
Stock warrants
Outstanding.................. 599,967 599,967 599,967
Price ranges................. $30.00 $30.00 $30.00
Expiration ranges............ 8/28/04 8/28/04 8/28/04
Convertible preferred shares
Number of common shares at
the applicable conversion
ratio....................... - - 2,400,000
13. Fiduciary Funds
The consolidated balance sheets do not include the net assets of escrow,
agency and fiduciary funds, which amounted to $370.9 million and $201.6 million
at December 31, 1999 and 1998, respectively.
51
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Disclosures About Fair Value of Financial Instruments
Notes Receivable. The Company has determined that it is not practicable to
estimate the fair value of the notes receivable amounting to $1.0 million and
$1.7 million at December 31, 1999 and 1998, respectively, due to the cost
involved in developing the information as such notes are not publicly traded.
Based on dealer's quote, the estimated fair value of the Company's $175.0
million Senior Subordinated Note, as discussed in Note 8, is $155.3 million.
Estimated fair values for the Revolving Credit Facilities and the remaining
long-term debts are not presented because the Company believes that it is not
materially different from book value, primarily because the majority of the
Company's debt is based on variable rates.
52
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Industry Segments
In July 1999, the Company announced that it changed its segment reporting
from four segments to three segments. Prior periods were restated to conform
to the new segmentation. The three segments are Transaction Management,
Financial Services and Management Services. The factors for determining the
reportable segments were based on the type of service and client and on the
way the chief operating decision makers organize segments within the Company
for making operating decisions and assessing performance. Each business
segment requires and is responsible for executing a unique marketing and
business strategy. Transaction Management consists of commercial property
sales and leasing services, transaction management and advisory services,
investment property services (acquisitions and sales on behalf of investors).
Financial Services consists of mortgage loan origination and servicing through
L.J. Melody, investment management and advisory services through CB Richard
Ellis Investors, L.L.C., capital markets activities, valuation and appraisal
services and real estate market research. Management Services consists of
facilities and property management and related services. The 1999 result
includes proceeds from an insurance policy of $1.6 million, nonrecurring gains
of $8.7 million from the sale of five non-strategic offices and a small
insurance operation and one-time charges of approximately $10.2 million, the
majority of which were severance costs related to the Company's reduction in
workforce. The following tables summarize the revenue, cost and expenses, and
operating income by operating segment for the years ended December 31, 1999,
1998 and 1997 (dollars in thousands).
Year Ended December 31
--------------------------------
1999 1998 1997
---------- ---------- --------
Revenue
Transaction Management.................... $ 881,681 $ 762,951 $581,123
Financial Services........................ 177,479 145,250 89,780
Management Services....................... 153,879 126,302 59,321
---------- ---------- --------
$1,213,039 $1,034,503 $730,224
========== ========== ========
Operating income (loss)
Transaction Management.................... $ 80,969 $ 81,232 $ 67,020
Financial Services........................ (2,281) 6,849 2,970
Management Services....................... (1,789) 6,980 2,022
Merger-related and other nonrecurring
charges.................................. - (16,585) (12,924)
---------- ---------- --------
76,899 78,476 59,088
Interest income............................. 1,930 3,054 2,598
Interest expense............................ 39,368 31,047 15,780
---------- ---------- --------
Income before provision for income taxes.... $ 39,461 $ 50,483 $ 45,906
========== ========== ========
Depreciation and amortization
Transaction Management.................... $ 18,236 $ 13,722 $ 8,640
Financial Services........................ 12,707 11,025 6,764
Management Services....................... 9,527 7,438 2,656
---------- ---------- --------
$ 40,470 $ 32,185 $ 18,060
========== ========== ========
Capital expenditures
Transaction Management.................... $ 15,830 $ 12,669 $ 4,749
Financial Services........................ 11,030 10,179 3,718
Management Services....................... 8,270 6,867 1,460
---------- ---------- --------
$ 35,130 $ 29,715 $ 9,927
========== ========== ========
Equity interest in earnings (losses) of
unconsolidated subsidiaries
Transaction Management.................... $ 1,045 $ 315 $ 298
Financial Services........................ 3,758 706 (207)
Management Services....................... 2,725 2,422 (204)
---------- ---------- --------
$ 7,528 $ 3,443 $ (113)
========== ========== ========
53
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31
-----------------
1999 1998
-------- --------
Identifiable assets
Transaction Management...................................... $318,416 $326,943
Financial Services.......................................... 237,178 176,003
Management Services......................................... 277,339 291,225
Corporate................................................... 100,340 62,421
-------- --------
$933,273 $856,592
======== ========
Identifiable assets by industry segment are those assets used in the Company
operations in each segment. Corporate identified assets are principally made
up of cash and cash equivalents, inventoried property, general prepaids and
deferred taxes.
December 31
---------------
1999 1998
------- -------
Investment in and advances to unconsolidated subsidiaries
Transaction Management....................................... $10,479 $ 5,937
Financial Services........................................... 15,867 15,635
Management Services.......................................... 10,199 10,061
------- -------
$36,545 $31,633
======= =======
Geographic Information
Year Ended December 31
------------------------------
1999 1998 1997
---------- ---------- --------
Revenue
United States.................................. $ 940,341 $ 884,304 $730,224
All other countries............................ 272,698 150,199 -
---------- ---------- --------
$1,213,039 $1,034,503 $730,224
========== ========== ========
December 31
---------------
1999 1998
------- -------
Long-lived assets
United States................................................. $51,064 $56,973
All other countries........................................... 19,085 16,748
------- -------
$70,149 $73,721
======= =======
Long-lived assets are principally made up of property, plant and equipment,
property held for sale and inventoried property.
54
CB RICHARD ELLIS SERVICES, INC.
QUARTERLY RESULTS OF OPERATIONS AND OTHER FINANCIAL DATA
(Unaudited)
The following table sets forth the Company's unaudited quarterly results of
operations. The unaudited quarterly information should be read in conjunction
with the audited financial statements of the Company and the notes thereto.
The operating results for any quarter are not necessarily indicative of the
results for any future period.
1999 1998
---------------------------------------- ------------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
-------- -------- --------- --------- -------- ---------- --------- ---------
(Dollars in thousands)
Results of Operations:
Revenue
Leases............... $152,134 $111,430 $ 99,217 $ 78,146 $118,646 $ 97,763 $ 93,389 $ 61,502
Sales................. 126,014 106,695 80,181 77,514 104,255 93,770 96,195 63,498
Property and
facilities management
fees................. 29,595 26,689 26,910 26,612 27,565 23,838 19,997 14,979
Consulting and
referral fees........ 29,459 18,612 32,325 15,400 31,246 19,515 11,406 10,419
Appraisal fees........ 15,782 15,018 15,238 14,545 16,421 13,983 10,875 6,803
Loan origination and
servicing fees....... 13,882 10,247 9,755 6,680 11,777 11,750 8,214 7,661
Realty advisor fees... 8,206 7,854 7,132 5,737 9,390 7,348 10,079 6,328
Other................. 20,581 10,473 6,409 8,567 10,989 5,836 5,112 3,954
-------- -------- --------- --------- -------- ---------- --------- ---------
Total revenue........ 395,653 307,018 277,167 233,201 330,289 273,803 255,267 175,144
Costs and expenses:
Commissions, fees and
other incentives..... 184,960 137,709 116,659 96,949 143,192 119,959 113,098 82,214
Operating,
administrative and
other................ 164,989 139,262 133,960 121,182 139,094 117,909 111,333 80,458
Merger-related and
other nonrecurring
charges.............. - - - - - - 16,585 -
Depreciation and
amortization......... 10,507 10,001 9,968 9,994 10,099 9,337 7,427 5,322
-------- -------- --------- --------- -------- ---------- --------- ---------
Operating income........ 35,197 20,046 16,580 5,076 37,904 26,598 6,824 7,150
Interest income......... 69 791 536 534 1,086 703 538 727
Interest expense........ 9,698 10,294 10,203 9,173 9,688 9,628 7,410 4,321
-------- -------- --------- --------- -------- ---------- --------- ---------
Income (loss) before
provision (benefit) for
income tax............. 25,568 10,543 6,913 (3,563) 29,302 17,673 (48) 3,556
Provision (benefit) for
income tax............. 8,537 5,895 3,557 (1,810) 15,669 7,534 1,132 1,591
-------- -------- --------- --------- -------- ---------- --------- ---------
Net income (loss)....... $ 17,031 $ 4,648 $ 3,356 $ (1,753) $ 13,633 $ 10,139 $ (1,180) $ 1,965
======== ======== ========= ========= ======== ========== ========= =========
Other Financial Data:
EBITDA................ $ 45,704 $ 30,047 $ 26,548 $ 15,070 $ 48,003 $ 35,935 $ 30,836 $ 12,472
Net cash provided by
(used in) operating
activities........... $ 71,302 $ 46,934 $ 10,122 $ (54,347) $ 49,528 $ 27,798 $ 35,011 $ (35,723)
Net cash (used in)
provided by investing
activities........... $ (5,545) $ (6,735) $ (16,327) $ 1,840 $(23,724) $ (117,355) $ (59,998) $ (22,443)
Net cash (used in)
provided by financing
activities........... $(62,330) $(27,820) $ 2,389 $ 50,040 $(29,372) $ 71,188 $ 47,087 $ 30,535
55
CB RICHARD ELLIS SERVICES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Reserve for Allowance
Employee for Bad Legal Other
Loans Debts Reserve Reserves
----------- --------- ------- --------
Balance, December 31, 1996............. $1,710 $ 4,423 $ 9,321 $ -
Koll balance at the date of
acquisition......................... - 4,401 - 7,916
Charges to expense................... - 1,226 1,195 2,951
Write-offs, payments and other....... (893) (1,070) (709) (2,576)
------ ------- ------- -------
Balance, December 31, 1997............. 817 8,980 9,807 8,291
CB Canada balances at the date of
acquisition......................... - 606 - -
REI balances at the date of
acquisition......................... 256 2,211 - -
Hillier Parker balances at the date
of acquisition...................... 421 895 72 13,360
Charges to expense................... 364 2,978 1,843 -
Write-offs, payments and other....... (381) (2,322) (1,623) (5,677)
------ ------- ------- -------
Balance, December 31, 1998............. 1,477 13,348 10,099 15,974
Charges to expense................... - 2,560 2,164 26
Write-offs, payments and other....... (904) (348) (4,000) (2,006)
------ ------- ------- -------
Balance, December 31, 1999............. $ 573 $15,560 $ 8,263 $13,994
====== ======= ======= =======
56
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the headings "Nomination and Election of Directors,"
"Directors and Nominees for Directors," "Committees and Meetings of the Board
of Directors," "Management," "Certain Relationships and Related Transactions,"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders to be filed by the Company with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
Company's fiscal year is incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the headings "Directors Fees and Executive
Compensation" in the definitive Proxy Statement for the Company's 2000 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Principal Stockholders" in the
definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information contained under the headings "Executive Compensation" and
"Certain Relationships and Related Transactions" in the definitive Proxy
Statement for the Company's 2000 Annual Meeting of Stockholders is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)
1. Financial Statements
See Index to Consolidated Financial Statements set forth on page 28.
2. Financial Statement Schedule
See Index to Consolidated Financial Statements set forth on page 28.
3. Exhibits
See Exhibit Index beginning on page 59 hereof.
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CB RICHARD ELLIS SERVICES, INC.
(Registrant)
/s/ Raymond E. Wirta
By: _________________________________
Raymond E. Wirta
Chief Executive Officer
Date: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Raymond E. Wirta Chief Executive Officer and March 27, 2000
____________________________________ Director
Raymond E. Wirta
/s/ Ronald J. Platisha Executive Vice President, March 27, 2000
____________________________________ Financial Operations
Ronald J. Platisha
58
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------- ----------------------
2.1* Agreement and Plan of Reorganization dated as of May 13, 1997 by
and among CB Commercial Real Estate Services Group, Inc. (the
"Company"), CBC Acquisition Corporation, Koll Real Estate
Services, FS Equity Partners III, L.P., FS Equity Partners
International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The
Koll Holding Company and certain individual signatories thereto,
filed as Annex 1 to the Company's definitive proxy
statement/prospectus dated July 31, 1997 as part of the Company's
Registration Statement on Form S-4 Amendment No. 4 (File No. 333-
28731)
2.2* Offer Document dated February 7, 1998 from the Company to the
Shareholders of REI Limited, filed as Exhibit 2 to the Company's
Form S-3 Registration Statement (File No. 333-48875)
2.3* Form of Offer by the Partners of Hillier Parker May & Rowden for
the Entire Business of the Partnership to CB Hillier Parker Ltd.,
filed as Exhibit 2 to the Company's Current Report on Form 8-K
dated July 7, 1998
3.1* Fifth Restated Certificate of Incorporation of the Company, filed
as Exhibit 3.1(i) to the Company's Form 8-K dated May 20, 1998
3.2 Fifth Amended and Restated Bylaws of the Company
4.1* Specimen Form of Common Stock Certificate, filed as Exhibit 4.1 to
the Company's Form S-1 Registration Statement (File No. 333-
12757)
4.2* Form of the Company's Restricted Stock Agreement between the
Company and the Company's Officer or Employee, filed as Exhibit
4.8 to the Company's Form S-1 Registration Statement (File No.
33-29410)
4.3* First Amendment to the Company's Restricted Stock Agreement, filed
as Exhibit 4.9 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989
4.4* Form of Warrant Agreement between the Company, FS Equity Partners
III, L.P., FS Equity Partners International, L.P., AP KMS
Partners, L.P., AP KMS II, LLC, The Koll Holding Company and
certain individuals, with attached Form of Warrant Certificate,
filed as Annex 2 to the Company's definitive proxy
statement/prospectus dated July 31, 1997 as part of the Company's
Registration Statement on Form S-4 Amendment No. 4 (File No. 333-
28731)
4.5* First Supplemental Indenture between CB Richard Ellis Services,
Inc. and State Street Bank and Trust Company of California, N.A.,
as Trustee, dated as of May 26, 1998 for 8 7/8 percent Senior
Subordinated Notes due 2008 ("Subordinated Notes"), filed as
Exhibit 4.1 to the Company's Form 8-K dated May 20, 1998; and
Form of Indenture relating to the Subordinated Notes was filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-3
(File No. 333-48875)
10.1(i)*+ CB Commercial Real Estate Services Group, Inc. Omnibus Stock and
Incentive Plan, filed as Exhibit 10.13 to Post-Effective
Amendment No. 1 to the Company's Form S-1 Registration Statement
(File No. 33-29410)
10.1(ii)*+ First Amendment to the CB Commercial Real Estate Services Group,
Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1990
10.1(iii)*+ Second Amendment to the CB Commercial Real Estate Services Group,
Inc. Omnibus Stock and Incentive Plan, filed as Exhibit
10.16(iii) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993
10.1(iv)*+ Third Amendment to the CB Commercial Real Estate Services Group,
Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.4(iv)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994
59
EXHIBIT INDEX--(Continued)
Exhibit
Number Description of Exhibit
------- ----------------------
10.2(i)*+ 1990 Stock Option Plan, filed as Exhibit 4(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1990
10.2(ii)*+ First Amendment to the 1990 Stock Option Plan, filed as Exhibit
10.15(ii)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992
10.2(iii)*+ Second Amendment to the 1990 Stock Option Plan, filed as Exhibit
10.8(iii)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993
10.2(iv)*+ Third Amendment to the 1990 Stock Option Plan, filed as Exhibit
10.5(iv)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994
10.3+ CB Richard Ellis Services, Inc. Amended and Restated Annual
Management Bonus Plan
10.4(i)*+ CB Commercial Real Estate Services Group, Inc. 1991 Service
Providers Stock Option Plan, filed as Exhibit 10.27 to the
Company's Current Report on Form 8-K dated April 1, 1992
10.4(ii)*+ 1997 Amendment to the 1991 Service Providers Stock Option Plan,
filed as Annex 7 to the Company's definitive proxy
statement/prospectus dated July 31, 1997 as part of the Company's
Registration Statement on Form S-4 Amendment No. 4 (File No. 333-
28731)
10.5(i)*+ CB Commercial Real Estate Services Group, Inc. Amended and
Restated Deferred Compensation Plan, filed as Exhibit 10.6 to the
Company's Form 10-K for the year ended December 31, 1997
10.5(ii)*+ Amendment to the Amended and Restated Deferred Compensation Plan
(effective December 1, 1997) filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998
10.6*+ Amended and Restated 1996 Equity Incentive Plan of CB Commercial
Real Estate Services Group, Inc., filed as Annex 8 to the
Company's definitive proxy statement/prospectus dated July 31,
1997 as part of the Company's Registration Statement on Form S-4
Amendment No. 4 (File No. 333-28731)
10.7*+ CB Commercial Real Estate Services Group, Inc. L.J. Melody
Acquisition Stock Option Plan, filed as Exhibit 10.10 to the
Company's Form 10-K for the year ended December 31, 1996
10.8*+ Form of Indemnification Agreement between the Company, CB
Commercial Real Estate Group, Inc. and directors and officers,
filed as Exhibit 10.29 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1992
10.9*+ Employment Agreement between the Company and Lawrence J. Melody
dated July 1, 1996, filed as Exhibit 10.12 to the Company's Form
S-1 Registration Statement (File No. 333-12757)
10.10*+ CB Commercial Real Estate Services Group, Inc. 1997 Employee Stock
Option Plan, filed as Annex 5 to the Company's definitive proxy
statement/prospectus dated July 31, 1997 as part of the Company's
Registration Statement on Form S-4 Amendment No. 4 (File No. 333-
28731)
10.11*+ CB Commercial Real Estate Services Group, Inc. Koll Acquisition
Stock Option Plan, filed as Exhibit 10.13 to the Company's Form
10-K for the year ended December 31, 1997
10.12(i)*+ CB Commercial Real Estate Services Group, Inc. / KMS Holding
Corporation Amended 1994 Nonqualified Performance Stock Option
Plan, filed as Exhibit 10.14(i) to the Company's Form 10-K for
the year ended December 31, 1997
10.12(ii)*+ Form of Nonstatutory Stock Option Agreement evidencing substitute
options granted by the Company upon assumption of options issued
under the KMS Holding Corporation Amended 1994 Stock Option Plan,
filed as Exhibit 10.14(ii) to the Company's Form 10-K for the
year ended December 31, 1997
10.13*+ Consulting Agreement dated July 16, 1997 between CB Commercial
Real Estate Group, Inc. and Donald M. Koll, filed as Exhibit
10.15 to the Company's Form 10-K for the year ended December 31,
1997
60
EXHIBIT INDEX--(Continued)
Exhibit
Number Description of Exhibit
------- ----------------------
10.14*+ Employment Agreement dated May 23, 1997 between the Company and
James J. Didion, filed as Exhibit 10(iii)(17) to the Company's
Registration Statement on Form S-4 Amendment No. 1 (File No. 333-
28731)
10.15* Registration Rights Agreement by and among the Company, FS Equity
Partners III, L.P., FS Equity Partners International, L.P., AP
KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company,
Raymond E. Wirta and William S. Rothe, Jr. dated as of May 14,
1997, filed as Exhibit 10(i)(3) to the Company's Registration
Statement on Form S-4 (File No. 333-28731)
10.16*+ Noncompetition and Confidentiality Agreement by and among the
Company, CBC Acquisition Corporation, Koll Real Estate Services,
Donald M. Koll and The Koll Holding Company dated May 14, 1997,
filed as Exhibit 10(i)(4) to the Company's Registration Statement
on Form S-4 (File No. 333-28731)
10.17*+ Noncompetition and Confidentiality Agreement by and among the
Company, Koll Real Estate Services, and William S. Rothe dated as
of May 14, 1997, filed as Exhibit 10(i)(5) to the Company's
Registration Statement on Form S-4 (File No. 333-28731)
10.18*+ Noncompetition and Confidentiality Agreement by and among the
Company, Koll Real Estate Services, and Raymond E. Wirta dated as
of May 14, 1997, filed as Exhibit 10(i)(6) to the Company's
Registration Statement on Form S-4 (File No. 333-28731)
10.19*+ Employment Agreement by and between the Company and William Rothe
dated as of May 14, 1997, filed as Exhibit 10(iii)(1) to the
Company's Registration Statement on Form S-4 (File No. 333-28731)
10.20(i)* Credit Agreement dated as of August 28, 1997 by and among the
Company; Bank of America NT & SA; The Sumitomo Bank, Limited;
Wells Fargo Bank, N.A.; BHF-Bank Aktiengeselleshaft; Credit
Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch
and Grand Cayman Branch; Key Bank National Association; and other
financial institutions, filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 30, 1997
10.20(ii)* Amendment No. 1 dated as of January 21, 1998, to the Credit
Agreement dated as of August 28, 1997 by and among the Company;
Bank of America NT & SA; The Sumitomo Bank, Limited; Wells Fargo
Bank, N.A.; BHF-Bank Aktiengeselleshaft; Credit Lyonnais Los
Angeles Branch; Dresdner Bank AG, New York Branch and Grand
Cayman Branch; Key Bank National Association; and other financial
institutions, filed as Exhibit 10.22(ii) to the Company's Form
10-K for the year ended December 31, 1997
10.20(iii)* Amended and Restated Credit Agreement dated May 20, 1998 among CB
Richard Ellis Services, Inc.; Wells Fargo Bank, N.A., The Bank of
Nova Scotia; Credit Lyonnais Los Angeles Branch; Dresdner Bank
AG, New York Branch; Keybank National Association; The Long-Term
Credit Bank of Japan, Ltd., Los Angeles Agency; and other
financial institutions party to the agreement is filed as Exhibit
10.1 to the Company's Form 10-Q for the quarter ended June 30,
1998
10.20(iv)* Amendment No. 1 to the Amended and Restated Credit Agreement dated
May 20, 1998 among CB Richard Ellis Services, Inc.; Wells Fargo
Bank, N.A., The Bank of Nova Scotia; Credit Lyonnais Los Angeles
Branch; Dresdner Bank AG, New York Branch; Keybank National
Association; The Long-Term Credit Bank of Japan, Ltd., Los
Angeles Agency; and other financial institutions party to the
agreement is filed as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended September 30, 1998
10.21* Form of amendment to the Company's 1990 Stock Option Plan, the
1991 Service Providers Stock Option Plan, the L.J. Melody
Acquisition Stock Option Plan, and the Koll Acquisition Stock
Option Plan, filed as Exhibit 10.23 to the Company's Form 10-K
for the year ended December 31, 1997
61
EXHIBIT INDEX--(Continued)
Exhibit
Number Description of Exhibit
------- ----------------------
10.22(i)* Purchase Agreement dated as of May 15, 1995 among CB Commercial
Real Estate Group, Inc., Westmark Real Estate Acquisition
Partnership, L.P., and certain individuals signatory thereto,
filed as Exhibit 10.1 to the Company's Current Report on Form 8-K
dated June 30, 1995
10.22(ii)* Form of SPP Purchase Agreement by and among Westmark Real Estate
Acquisition Partnership, L.P., CB Commercial Real Estate Group,
Inc. and certain individuals, dated as of August 15, 1997, filed
as Exhibit 10.24(ii) to the Company's Form 10-K for the year
ended December 31, 1997
10.23+ Amended and Restated Employment Agreement by and between the
Company and James J. Didion entered into as of March 3, 1999.
11 Statement concerning Computation of Per Share Earnings (filed as
Note 12 of the Consolidated Financial Statements)
12 Computation of Ratio of Earnings to Fixed Charges and Preferred
Dividends
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule (filed only with the SEC)
- --------
* Incorporated by reference
+ Management contract or compensatory plan required by Item 601 of Regulation
S-K
(b) Report on Form 8-K
The registrant filed a Current Report on Form 8-K dated November 10, 1999
concerning the Company's press release announcing the results of operations
for the three and nine months ended September 30, 1999 under the new
segment reporting.
62