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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-12231
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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 No.)
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)
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock $.01 par value
Securities registered pursuant to Section 12(g) of the Act:
None
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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 this Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock held by non-
affiliates of the Registrant on February 26, 1999 was $240,031,399.
Number of shares of Common Stock outstanding at February 26, 1999 was
20,641,401.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its May 18, 1999
Annual Meeting of Stockholders are incorporated by reference in Part III.
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PART I
Item 1. Business
Company Overview
CB Richard Ellis Services, Inc. ("CBRE Services") a holding company that
conducts its operations through more than 100 direct and indirect subsidiaries
including CB Richard Ellis, Inc. ("CBRE"), L.J. Melody & Company, CB Richard
Ellis Investors, L.L.C. ("CBRE Investors") and CB Hillier Parker Limited (CBRE
Services and its direct and indirect subsidiaries are herein collectively
referred to as the "Company").
The Company is the largest vertically-integrated commercial real estate
services company in the world with 1998 revenue of $1.035 billion,
approximately 140 principal offices in the U.S. and over 90 offices outside
the U.S. including offices in Argentina, Australia, Brazil, Belgium, Canada,
France, Germany, Hong Kong, India, Italy, the Netherlands, New Zealand,
Peoples Republic of China, Portugal, Singapore, Spain, Switzerland, Taiwan,
and the United Kingdom. The Company provides a full range of services to
commercial real estate tenants, owners and investors including: (i) brokerage
(facilitating sales and leases) ("Brokerage Services"); (ii) transaction
management, consulting services and facilities management services to
corporate real estate users ("Corporate Services"); (iii) property management
and related services ("Asset Services"); and (iv) capital market activities,
including mortgage origination and servicing, investment management and
advisory services, investment property transactions (acquisitions and sales on
behalf of investors), real estate market research and valuation services
(collectively "Financial Services").
Industry Trends
Over the last ten years, the commercial real estate industry has experienced
various structural changes, and since 1994 the industry has generally
experienced a broad recovery from the real estate "depression" of the early
1990s. However, in September and October of 1998 a mini-liquidity crisis
occurred in the many of the world's capital markets (and particularly the
Commercial Mortgage-Backed Securities ("CMBS") market) which has adversely
affected investment property transactions on a worldwide basis and slowed down
the rate of growth in Brokerage Services and mortgage origination. This mini-
liquidity crisis is expected to continue into the first half of 1999 and
possibly beyond but it is the Company's belief that it is a temporary
phenomenon and not a structural change. Accordingly, management believes that
the factors and the resulting trends which have favorably influenced real
estate services since 1994 will continue once liquidity returns. The most
important of these factors and trends are discussed below. The Company
believes that overall, they create a continuing opportunity for the Company to
leverage its experience, multi-discipline integrated services, multi-market
presence and brand equity to its competitive advantage but recognizes (as the
events of September and October of 1998 demonstrated) that their generally
positive influence can be adversely affected by changes in global economic
conditions.
. Healthy Commercial Real Estate Markets.
Coincident with the longer term structural shifts in the commercial real
estate industry, commercial real estate markets in the United States, Europe
and Australia have essentially recovered over the last several years,
experiencing increased activity in many product types and geographical market
areas. This has been particularly true in California, where the Company has a
significant market presence. Relatively strong markets also are prevalent in a
number of other major real estate markets where the Company has operations,
including Australia, the United Kingdom (although the rate of growth in 1999
is expected to be slower than that of 1998), France and the Netherlands and in
the United States, Arizona, Texas, the New England area and the Washington,
D.C./Baltimore areas. Office and industrial building occupancy levels have
generally been rising, rental rates have been increasing and, correspondingly,
property values have been rising. In Asia the trend throughout most of 1998
was declining revenues as the various Asian countries attempted to deal with
their significant economic problems. The Company believes that those problems
will continue in 1999 and beyond but that in certain countries potential for
profit exists on an opportunistic basis.
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. Changing Composition and Needs of Investors in and Owners of Commercial
Real Estate Assets.
Investors in and owners of commercial real estate assets have become
increasingly institutional (including pension funds, life insurance companies,
banks, property companies and in the United States, publicly-held real estate
investment trusts ("REIT")). Simultaneously, their investment and management
needs have become increasingly multi-market due to the fact that 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. The Company believes that the REITs are a potential
growth area if Wall Street puts a premium on growth in funds from operations
("FFO") and because of this influence, REITs elect to outsource various
property management functions which can be performed more efficiently by
broadly based management organizations like the Company. However, to date the
Company has seen no indication of REIT outsourcing due to expense containment
although the Company currently manages multiple assets for several REITs and
frequently originates mortgages for them.
. Continuing Corporate Outsourcing Trend.
Shareholder pressure for higher performance and return on equity within most
public 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 North American, European, South American and Asian companies
interested in outsourcing and provides a global network of very high quality
to provide service 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.
. Changing CMBS Market.
The CMBS market has developed to a stage where it is an integral funding
source for real estate markets in the United States and is benefiting the
industry by enhancing the liquidity level for real estate although that
liquidity was materially and adversely affected beginning in the late third
quarter of 1998 as a result of a series of worldwide events. As a consequence
of those events, the Company's CMBS mortgage originations and investment
property transactions in the fourth quarter of 1998 were, and in the first
quarter of 1999 are expected to be, reduced. Historically, the majority of
third-party financing for commercial real estate assets was provided by banks
and insurance companies who generally held the mortgage loans they originated
to the maturity date of the mortgage loans. More recently, Wall Street firms
and financial institutions have been providing a significant amount of third-
party mortgage financing, and have been accessing the public debt markets by
issuing CMBS in order to securitize their portfolios and avoid holding
mortgage loans for the long term. The Company believes that its overall market
presence, extensive available market data and access to real estate
transaction deal flow positions its mortgage banking business to benefit
substantially from the expansion of the CMBS market. The Company's national
geographic coverage and mortgage origination capabilities through its L. J.
Melody & Company subsidiary have caused it to become one of the largest
suppliers of commercial mortgages to the CMBS market (over $1.9 billion in
aggregate originations in 1998 or 27% of the Company's $7 billion in new
originations). In addition, the Company expects to service a majority of the
mortgage loans that it originates and the profit margin potential for
servicing an increasing volume of mortgage loans may be significant for the
Company's mortgage banking business. The Company currently services over $11
billion in loans. The Company does not currently securitize loans or take
principal risk in its mortgage origination business. The Company
2
believes that the liquidity problems which adversely affected the CMBS markets
in late 1998 and early 1999 are temporary, but there can be no assurance that
this belief is accurate.
Acquisitions
The Company does not presently intend to pursue a substantive acquisition
strategy in 1999 but it will consider opportunistic acquisitions in its
mortgage banking, brokerage and property management businesses.
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
acquisition financing, management anticipates that past acquisitions have and
future acquisitions may adversely affect net income, especially in the first
year or two following the acquisition. This problem is compounded when, as in
the case of the 1997 Koll acquisition, 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 is 47-51% when the actual 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 (which costs the Company intends to take as a single charge at the time
of the acquisition to the maximum extent possible). Finally, acquisitions can
present serious integration problems both in terms of personality and cultural
differences (both of which caused material problems in integrating CB Richard
Ellis Investors), and in terms of stress on accounting personnel and other
infrastructure systems (which materially slowed the integration of Koll Real
Estate Services and to some extent has slowed the financial integration of
REI). 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
Brokerage Services
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. In 1998, the Company generated revenues from commercial
real estate brokerage services of approximately $546.4 million representing
approximately 30,400 completed transactions. In 1998, brokerage facilitated
over 5,600 sale transactions with an aggregate estimated total consideration
of approximately $23.0 billion and approximately 25,000 lease transactions
involving aggregate rents, under the terms of leases facilitated, of
approximately $19.0 billion.
Brokerage Services comprise the largest source of revenue for the Company
and provide 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. As of December 31, 1998 the Company employed approximately 1,800
brokerage professionals in offices located in most of the largest Metropolitan
Statistical Areas ("MSAs") in the United States and approximately 400
brokerage professionals in the rest of the world. The Company maintains a
decentralized approach to brokerage services (other than investment properties
which are a part of financial services), bringing significant local knowledge
and expertise to each assignment. Each local office draws upon the broad range
of support services 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, or soon will, be centralized.
3
In order to increase market share in secondary markets in the United States
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, 1998, the Company had established such partnership-type
arrangements in Des Moines, Iowa; Louisville, Kentucky; Buffalo and Rochester,
New York; Charleston and Columbia, South Carolina; Memphis, Tennessee; Madison
and Milwaukee, Wisconsin; Toledo, Ohio; El Paso, Texas; South Bend and Ft.
Wayne, Indiana; and East Lansing and Grand Rapids, Michigan. The Company does
not believe that it would be cost efficient to add additional partners to this
program. In 1997, the Company contributed its brokerage and property
management business in the New England area to a partnership and Whittier
Partners, a prominent New England real estate services firm, did likewise. 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.
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 United States typically range
from approximately 1% to 6% with the rate of commission declining as the price
of the property increases. Outside of the United States commissions of 1% to
4% are typical. Lease commissions in the United States 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 and 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
United States, 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 United States 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 approximates 50% of the Company's share of
commissions.
Corporate Services
The Company provides corporate services to major corporations around the
world. Corporate services include assisting corporations in developing and
executing multiple-market real estate strategies and facilities management
services. 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 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 and facilities management objectives. Corporate services
coordinates the utilization of all the Company's various disciplines to
deliver an integrated service to its clients. Essentially, corporate services
expands a client's real estate department and supports most of the functions
involved in a corporate real estate department.
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. As of
December 31, 1998, the Company had approximately 110 million square feet under
facilities management. While most of the properties for which the Company
provides facilities management are located within the United
4
States, the Company is providing such services in Italy and China for a total
of approximately 1.5 million square feet and expects its facilities management
business outside of the United States to grow rapidly in 1999. However,
outside the United States, the facilities management business is not expected
to be profitable in 1999.
Operations. The Company's facilities management operations in the United
States are organized into three geographic regions in the Eastern, Western and
Central areas of the United States, with each geographic region comprised of
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. A typical corporate services agreement gives the Company the
right to execute some or all of the client's future sales and leasing
transactions. The commission rate with respect to such transactions frequently
reflects a discount for the captive nature and large volume of the business.
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.
Term. A typical corporate services agreement includes a stated term of at
least one year and normally contains provisions for extension of the
agreement. Facilities management agreements are typically multi-year
agreements which can be cancelled by the client on three to six months notice,
but generally can be cancelled by the Company only for cause.
Asset Services
The Company provides value-added asset and related services for income-
producing properties owned primarily by institutional investors and, as of
December 31, 1998, managed approximately 351 million square feet of commercial
space in the United States, 44 million square feet in the United Kingdom and
27 million square feet in the rest of the world.
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 sales brokerage services.
Operations. The Company employs approximately 1,300 individuals in its asset
services business in the United States and an additional, approximately 250
individuals in its asset services business outside of the United States. 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
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personnel generally utilize state-of-the-art computer systems for accounting,
marketing, and maintenance management.
Compensation. Under a typical asset services agreement in the United States,
the Company will be entitled to receive management fees and lease commissions.
Outside of the United States, 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 increase and
decrease 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
United States, lease commissions, which are paid in addition to the management
fee, are similar to those described for brokerage services. In the United
States, employees who provide leasing services 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.
Financial Services
Mortgage Banking
The Company provides its mortgage origination and mortgage loan servicing
almost entirely in the United States through L.J. Melody, which was acquired
in July 1996 and is based in Houston, Texas. The Company originated
approximately $7.0 billion of mortgages in 1998. As part of these origination
activities, the Company has special conduit arrangements with affiliates of
Merrill Lynch & Co., Citicorp, NationsBank, Heller Financial, J. P. Morgan, GE
Capital, RFC Commercial, Lehman Brothers, Bear Stearns and Deutsche Bank
Securities 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. The Company may originate mortgages into other conduit
programs where it does not have servicing rights. The Company originates and
services loans for Federal Home Loan Mortgage Corp. (Freddie Mac) and is a
major mortgage originator for insurance companies having originated mortgages
in the names of the insurance companies valued at approximately $4.0 billion
in 1998. The Company has correspondent arrangements with various life
insurance companies and pension funds which entitle it to service the mortgage
loans it originates. As of December 31, 1998, the Company serviced mortgage
loan portfolios of approximately $11.0 billion.
Operations. The Company employs approximately 80 mortgage banking
professionals in 24 offices in the United States. The Company has no material
mortgage banking operations outside of the United States. The Company's
mortgage loan originations take place throughout the United States, 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 Houston, Texas.
Compensation. The Company typically receives origination fees, ranging from
0.5% for large insurance company mortgage loans to 1.0% for most conduit
mortgage loans. In addition, the Company can earn special incentive fees from
various conduit programs. In 1998, the Company received approximately $1.5
million from such incentives. In situations where the Company services the
mortgage loans which it originates, it also receives
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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 1998 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 Properties
Since 1992, investment properties has provided sophisticated strategic
planning for, and execution of, acquisitions and sales of income-producing
properties for its clients. In 1998, the Company completed approximately 2,400
investment property transactions worldwide with an aggregate value of over
$17.7 billion. On behalf of property owners seeking to dispose of investment
properties, the Company strives to ensure that the owner achieves the maximum
value in the minimum amount of time by providing services which include
(i) accessing the Company's proprietary databases and other information
sources to provide real-time knowledge of available properties, completed
comparable transactions, real estate market trends, and active investors in
the market, and to assist with valuation and buyer identification, and (ii)
designing the appropriate marketing strategy that allows the owner to target
probable buyers or buyer categories. On behalf of prospective investors,
access to the same sources of information provides the Company's clients with
a competitive advantage by enabling the Company's professionals (i) to
identify the geographical areas around the world and specific properties in
those areas which are most suitable for the investor and (ii) to advise the
client in negotiations and due diligence. The investment properties group
operates on a coordinated worldwide basis and crosses all geographical
boundaries.
Operations. As of December 31, 1998, the Company employed approximately 500
investment properties professionals who exclusively handle acquisitions and
sales of investment properties. Approximately 300 of the investment property
professionals are located in the United States and approximately 200 in the
rest of the world.
A team of professionals with expertise within a given market and property
type is assembled for each investment properties assignment to best accomplish
the client's objectives. As necessary, the team may also include professionals
from the Company's other disciplines. On larger and more complex 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.
Compensation. Under the typical investment properties agreement, the Company
is entitled to receive sale commissions, which are calculated as a percentage
of sales price and are generally earned by the Company at the close of escrow.
In cases where another real estate broker is not involved, sale commissions
earned by the Company in the United States typically range from 1% to 6% of
the sales price, with the rate of commissions generally declining as the sales
price increases. Outside of the United States sales commissions range from 1%
to 4% of the sales price. In cases where another firm is involved in the
transaction, the Company must typically share up to 50% of the commission it
would have otherwise received with the other firm. About half of the Company's
investment properties professionals are paid on a commission-only basis and
the other half receive salary and incentive compensation; most commission-only
professionals are either in the United States or Australia.
Investment Management and Investment Products
The investment advisory and investment activities of the Company are divided
into two basic parts--CBRE Investors and the pension plan advisory services of
CB Hillier Parker. Historically, most of CBRE Investors' business has been
with pension plans in the form of either commingled funds or separate
accounts. Recently,
7
CBRE Investors has begun to develop new products, generally in the form of a
real estate operating company, which focus on United States pension plans as
core investors but are also designed to be attractive to non pension plan
investors. These higher potential yield products generally involve co-
investment by the Company and a dedicated group of employees and the Company
and such employees generally share in a "promote" (a right to a
disproportionate share of profits) if pre-agreed returns are achieved for the
investors. To date these new products include a $100 million (pre-leverage)
fund to invest in Asia with a major institutional investor, a fund to invest
in Japan ($300 million equity target) for which the Company is currently
raising funds and a United States fund to make value added investments to be
sold within a relatively short time horizon. In most cases, the Company
expects to be able to provide ancillary services to these funds such as
brokerage and asset management. In most, but not all, of the new funds,
contributions are made only as properties are purchased. In the United
Kingdom, CB Hillier Parker manages more than $2.6 billion in core real estate
mainly for pension plans. In the United States, CBRE Investors manages more
than $4.1 billion, mainly for pension plans.
Operations. CBRE Investors is organized into three basic divisions,
fiduciary services (aimed primarily at the pension investor), new products
(which consists of the various new co-investment funds) and research. CBRE
Investors currently employs approximately 115 people in Los Angeles, Boston,
Tokyo and Singapore. CB Hillier Parker employs approximately 20 people in
London with respect to its pension advisory business.
Over the past three years, the assets under management by CBRE Investors
have declined as various commingled funds have reached their scheduled
termination date. During 1998 the Company attracted $750.0 million of new
assets for management and distributed $1.16 billion to investors for a net
reduction in assets under management of approximately $400.0 million. The
Company believes that as a result of its new products its net assets under
investment by CBRE Investors will experience positive growth in 1999, although
there can be no assurance in this regard. CB Hillier Parker assets under
management grew in 1997 and ended the year at $2.6 billion.
Compensation. CBRE Investors fees are typically higher for managing
commingled and other funds involving pension plan investors than they are for
separate accounts and funds with mainly non-pension investors, but all of the
fees are within the ranges indicated below. CBRE Investors typically receives
an annual asset management fee which is typically 0.5% to 1.2% of the lower of
the cost of the assets managed or their fair market value. When debt is
managed, the asset management fee is at the lower end of the range. CBRE
Investors generally (but not always) receives an acquisition fee when it
acquires property or places debt on behalf of a client that is typically 0.5%
to 1.0% of funds invested or debt placed (the placement fee for debt is at the
low end of this range). In some, but not all cases, CBRE Investors receives an
incentive fee when an asset or a fund is sold. Typically, the incentive fee
will only be payable after the client has achieved a specified real (adjusted
for inflation) rate of return of 8% to 12% and is a percentage of value in
excess of that return. With respect to most of the Company's new funds, it
also derives fees from ancillary services including brokerage, asset
management and mortgage origination and a "promote" if certain thresholds are
achieved.
Term. The term of CBRE Investors' advisory agreements vary by the form of
investment vehicle utilized. In the commingled funds, the term has
historically been 10 years with extension and early termination provisions
based upon a vote of the investors. Currently the term is three to five years.
In the Company's separate account relationships, the agreements are generally
one to three years in term, with "at will" termination provisions. In most of
the Company's separate accounts, it does not have investment discretion. In
the case of new funds in which CBRE Investors makes a co-investment, it
generally can be terminated as manager on short notice but retains its equity
position (other than any promote).
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, 1998, the Company's appraisal staff had more than
380 professionals with approximately 50% of the staff holding professional
designations. The business is operated internationally through 76 offices and
its clients are generally
8
corporate and institutional portfolio owners and lenders. In 1998, the Company
performed more than 12,900 valuation and appraisal assignments. Approximately
140 of the Company's appraisal professionals are located in the U.S.
Real Estate Market Research
Real estate market research services are provided by 23 professionals in
Boston, Massachusetts employed by CB Richard Ellis/Torto Wheaton Research.
Real estate market research services are provided to the Company's other
businesses as well as sold to third-party clients and include (i) data
collection and interpretation, (ii) econometric forecasting, and (iii)
evaluating marketing opportunities and portfolio risk for institutional
clients within and across the U.S. commercial real estate markets. The
Company's publications and products provide real estate data for more than 50
of the largest MSAs in the United States and are sold on a subscription basis
to many of the largest portfolio managers, insurance companies and pension
funds in the United States. The National Real Estate Index also compiles
proprietary market research for nearly 66 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 135
of the largest real estate market investment trusts.
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, is expected to be in place with respect to internal
and external accounting by late 1999 and is expected to be fully in place by
mid-2000. 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 175 employees, most of
whom are located in the United States. The Company has outsourced a
significant part of its information technology requirements.
Year 2000 Computer Issues
See Part II, Item 7--"Management's Discussion and Analysis of Financial
Condition and Results of Operation."
Competition
The market for commercial real estate brokerage and other real estate
services provided by the Company is both highly fragmented and highly
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, corporate service or facility management
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 United States) with a large
number of mortgage banking firms and institutional lenders as well as regional
and national investment banking firms and insurance companies in 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.
The Company's asset services business--located principally in the United
States and the United Kingdom--compete for the right to manage properties
controlled by third parties. The competitor may be the owner of the
9
property (who is trying to decide the efficiency of outsourcing) or another
asset 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
As of December 31, 1998, the Company had approximately 9,400 employees
located in more than 30 countries. All of the Company's U.S. 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 owns a building in downtown Los Angeles, California, which,
until early 1999, was the Company's headquarters. The Company is in the
process of selling this building. In addition to the Company's headquarters,
the Company owns one small office building in Phoenix, Arizona.
The Company also leases office space on terms that vary depending on the
size and location of the office. The leases expire at various dates through
2007. 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 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 $6.5 million in general and 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. Based on available reserves, 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.
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 million in punitive damages, allocating the punitive damage
award $7 million as against Prudential and $3 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 have
filed an appeal of the judgment. The Company believes that it has adequate
insurance coverage for the compensatory portion of the judgment and adequate
reserves for the punitive portion, as well as potential indemnity claims for
the entire judgment.
10
In addition, as a result of the thousands of transactions in which the
Company participates and its employment of approximately 9,400 people, it is a
party to a number of pending or threatened lawsuits, arising out of or
incident to the ordinary course of its business. At any given time, the
Company typically is a defendant in 175 to 200 legal proceedings and a
plaintiff in 50 to 75 legal proceedings. Management believes that any
liability to the Company, net of insurance proceeds, that may result from
proceedings to which it is currently a party will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
As part of its process of minimizing, to the extent possible, potential
litigation, the Company requires its sales professionals in the United States
to agree to contribute each month toward a "Reserve Account" to be used
whenever a claim of professional liability is asserted. In addition, each
sales professional contractually agrees to be responsible for a portion of any
amount paid to defend or settle a claim against that professional or for any
resulting judgment.
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 on November 7, 1997 under the symbol "CBG." Prior to that, the
Company's Common Stock traded on the Nasdaq Stock Market--National Market
System ("NASDAQ--NMS") under the symbol "CBCG" from November 26, 1996 through
November 6, 1997. 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, and the high and low bid prices for the Common Stock
on the NASDAQ--NMS.
Year Ended December 31, 1997 High Low
---------------------------- -------- ------
First Quarter................................................ 27 3/8 18 1/4
Second Quarter............................................... 30 3/4 20 3/4
Third Quarter................................................ 33 3/4 28 3/4
Fourth Quarter (through November 6, 1997).................... 39 1/2 32 1/4
Fourth Quarter (from November 7, 1997)....................... 38 28 1/2
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) As of February 28, 1999, the Company had 852 record holders of its
Common Stock.
(3) 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.
(4) In June 1998, the Company sold 25,000 shares of Common Stock to an
executive officer of the Company under the Company's 1996 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.
12
Item 6. Selected Financial Data
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL INFORMATION:
(Dollars in thousands except per share data)
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS
DATA:
Revenue................. $1,034,503 $ 730,224 $ 583,068 $ 468,460 $ 428,988
Costs and Expenses:
Commissions, fees and
other incentives..... 447,333 364,403 292,266 239,018 225,085
Operating,
administrative and
other................ 459,924 275,749 228,799 187,968 170,234
Merger-related and
other nonrecurring
charges.............. 16,585 12,924 - - -
Depreciation and
amortization......... 32,185 18,060 13,574 11,631 8,091
---------- ---------- ---------- ---------- ----------
Operating income........ 78,476 59,088 48,429 29,843 25,578
Interest income......... 3,054 2,598 1,503 1,674 1,109
Interest expense........ 31,047 15,780 24,123 23,267 17,362
---------- ---------- ---------- ---------- ----------
Income before provision
(benefit) for income
tax.................... 50,483 45,906 25,809 8,250 9,325
Provision for income
tax.................... 25,926 20,558 11,160 841 152
Reduction of valuation
allowances(1).......... - - (55,900) - -
---------- ---------- ---------- ---------- ----------
Net provision (benefit)
for income tax......... 25,926 20,558 (44,740) 841 152
---------- ---------- ---------- ---------- ----------
Income before
extraordinary items.... 24,557 25,348 70,549 7,409 9,173
Extraordinary items,
net.................... - 951 - - -
---------- ---------- ---------- ---------- ----------
Net income.............. $ 24,557 $ 24,397 $ 70,549 $ 7,409 $ 9,173
========== ========== ========== ========== ==========
Net income (loss)
applicable to common
stockholders(2)........ $ (7,716) $ 20,397 $ 69,549 $ 7,409 $ 9,173
Basic earnings (loss)
per share(2)........... $ (0.38) $ 1.34 $ 5.05 $ 0.55 $ 0.69
Number of shares used in
computing basic
earnings (loss) per
share(2)............... 20,136,117 15,237,914 13,783,882 13,499,862 13,264,405
Diluted earnings (loss)
per share(2)........... $ (0.38) $ 1.28 $ 4.99 $ 0.55 $ 0.69
Number of shares used in
computing diluted
earnings (loss) per
share(2)............... 20,136,117 15,996,929 14,126,636 13,540,541 13,305,118
OTHER DATA:
EBITDA(3)............... $ 127,246 $ 90,072 $ 62,003 $ 41,474 $ 33,669
Net cash provided by
operating activities... $ 76,614 $ 80,835 $ 65,694 $ 30,632 $ 31,418
Net cash used in
investing activities... $ (223,520) $ (18,018) $ (10,906) $ (24,888) $ (3,865)
Net cash provided by
(used in) financing
activities............. $ 119,438 $ (64,964) $ (28,505) $ (11,469) $ (4,923)
As of December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 19,551 $ 47,181 $ 49,328 $ 23,045 $ 28,770
Total assets............ 856,892 500,100 278,944 190,954 150,100
Total long-term debt.... 373,691 146,273 148,529 250,142 233,571
Total liabilities....... 660,175 334,657 280,364 345,642 314,648
Minority interest....... 5,875 7,672 95 - -
Total stockholders'
equity (deficit)....... 190,842 157,771 (1,515) (154,688) (164,548)
- --------
(1) See Note 10 of Notes to Consolidated Financial Statements.
(2) See Per Share Information in Note 11 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, extraordinary items, and income taxes. 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 (subject to the payment of interest and income taxes)
generated that can be used by the Company to service its debt and 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
CB Richard Ellis Services, Inc. through its direct and indirect subsidiaries
(collectively the "Company") provides real estate services through
approximately 230 offices worldwide including but not limited to the United
States, Argentina, Australia, Brazil, Belgium, Canada, France, Germany, Hong
Kong, India, Italy, the Netherlands, New Zealand, People's Republic of China,
Portugal, Singapore, Spain, Switzerland, Taiwan, and United Kingdom. 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 U.S. real estate broker to being a diversified
global real estate services firm. Its outsourcing, transaction management,
advisory services and facilities management services to corporate real estate
user services (referred to as "Corporate Services"), property management and
related services ("Asset Services") and capital market activities, including
mortgage banking, brokerage and servicing, investment management and advisory
services, investment property transactions (including acquisitions and sales
on behalf of investors), real estate market research and valuation and
appraisal services (collectively "Financial Services") are either the largest
or one of the largest such businesses in both the world and the United States
and in the aggregate accounted for more than $488.1 million in 1998 revenue.
The Company's core brokerage business, commercial property sales and leasing
("Brokerage Services") accounted for approximately $546.4 million in 1998
revenue and is one of the largest such businesses in the United States.
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 acquisition financing, past acquisitions have
and future acquisitions may adversely affect net income. 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 (which the Company intends to reflect as a statement of operations
charge or as part of the purchase price at the time of the acquisition as
appropriate). Management's strategy is to pursue acquisitions that are
expected to be accretive to income before interest expense and provision for
amortization of goodwill and intangibles, if any, and to operating cash flows
(excluding the costs of integration). In 1998, acquisitions accounted for
approximately $157.0 million of revenues.
Revenue from Brokerage Services and the investment properties component of
Financial Services, which constitutes a substantial majority of the Company's
revenue, is largely transactional in nature and 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. Between 50.0% and 55.0% of the
costs and expenses associated with Brokerage Services and the investment
properties component of Financial Services are directly correlated to revenue
while approximately 25.0% of the costs and expenses of Corporate Services,
Asset Services and Financial Services, excluding investment properties, 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, 1998, 1997, and
1996, presented in dollars and as a percentage of revenue.
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
---------------- -------------- ---------------
(Dollars in thousands)
Revenue.................... $1,034,503 100.0% $730,224 100.0% $583,068 100.0%
Costs and expenses:
Commissions, fees and
other incentives........ 447,333 43.2 364,403 49.9 292,266 50.1
Operating, administrative
and other............... 459,924 44.5 275,749 37.8 228,799 39.3
Merger-related and other
nonrecurring charges.... 16,585 1.6 12,924 1.8 - -
Depreciation and
amortization............ 32,185 3.1 18,060 2.4 13,574 2.3
---------- ----- -------- ----- -------- -----
Operating income........... 78,476 7.6 59,088 8.1 48,429 8.3
Interest income............ 3,054 0.3 2,598 0.3 1,503 0.2
Interest expense........... 31,047 3.0 15,780 2.2 24,123 4.1
---------- ----- -------- ----- -------- -----
Income before provision
(benefit) for income tax.. 50,483 4.9 45,906 6.2 25,809 4.4
Provision for income tax... 25,926 2.5 20,558 2.8 11,160 1.9
Reduction of valuation
allowances................ - - - - (55,900) (9.6)
---------- ----- -------- ----- -------- -----
Net provision (benefit) for
income tax................ 25,926 2.5 20,558 2.8 (44,740) (7.7)
---------- ----- -------- ----- -------- -----
Income (loss) before
extraordinary items....... 24,557 2.4 25,348 3.4 70,549 12.1
Extraordinary items, net... - - 951 0.1 - -
---------- ----- -------- ----- -------- -----
Net income................. $ 24,557 2.4% $ 24,397 3.3% $ 70,549 12.1%
========== ===== ======== ===== ======== =====
EBITDA..................... $ 127,246 12.3% $ 90,072 12.3% $ 62,003 10.6%
========== ===== ======== ===== ======== =====
Since 1992, the Company's results have benefitted from its ability to take
advantage of a significant and ongoing recovery in U.S. commercial real estate
markets and the generally rising occupancy, 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, 1998 Compared to Year Ended December 31, 1997
The Company reported consolidated net income of $24.6 million for the year
ended December 31, 1998, on revenues of $1.035 billion. However, the $32.3
million deemed dividend resulting from the accounting treatment of the
preferred stock repurchase resulted in the net loss applicable to common
stockholders of $7.7 million, or $0.38 diluted loss per share for the year
ended December 31, 1998. Excluding the deemed dividend 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 U.S., a full
contribution from Koll Real Estate Services ("Koll") and a partial
contribution from REI Limited ("REI") and Hillier Parker ("HP") and various
other acquisitions. This improvement reflected both the Company's position and
increasing consumer confidence in the U.S. 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
15
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 Commercial Mortgage-Backed Securities ("CMBS") market in particular
which began in September of 1998 and have continued through the first quarter
of 1999.
Commissions, fees and other incentives on a consolidated basis were $447.3
million, an increase of $82.9 million or 22.8% 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 43.2% 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 and REI and HP which generally do not operate
under a commission-based program.
Operating, administrative and other on a consolidated basis was $459.9
million, an increase of $184.2 million or 66.8% 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 44.5% 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. The Company intends to sell and relocate
from its historic headquarters building.
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, an
increase of $5.4 million or 26.1% for the year ended December 31, 1998, as
compared to the year ended December 31, 1997. The increase in tax expense is
attributable to increased earnings which include international earnings from
various foreign jurisdictions. In early 1998 the Company repurchased its
outstanding preferred stock which triggered a limitation on the annual amount
of net operating loss ("NOL") it can use to offset future U.S. 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, extraordinary items, and income taxes.
Management believes that the presentation of EBITDA will enhance a
16
reader's understanding of the Company's operating performance and ability to
service debt as it provides a measure of cash (subject to the payment of
interest and income taxes) generated that can be used by the Company to
service its debt and 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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company reported consolidated net income of $24.4 million ($1.28 diluted
earnings per share) in 1997, on revenues of $730.2 million. Reflected in the
consolidated net income are merger-related and other nonrecurring charges of
$12.9 million, $2.1 million in amortization related to the write-off of
Langdon Rieder acquisition goodwill and an extraordinary loss of $1.0 million
net of a tax benefit of $0.7 million resulting from debt extinguishment.
Excluding these charges and their related tax impact, the Company's
consolidated net income would have been $33.6 million (or 4.6% of revenue) and
diluted earnings would have been $1.83 per share.
Revenues on a consolidated basis were $730.2 million, an increase of $147.2
million or 25.2% for the year ended December 31, 1997, compared to the year
ended December 31, 1996. The overall increase reflected a continued
improvement in the commercial real estate markets across the country, the
acquisition of Koll at the end of August 1997 and a full year of revenue from
L.J. Melody & Company ("L.J. Melody") which was acquired in July of 1996. This
improvement reflected both the Company's position and increasing confidence in
the national economy and, in particular, real estate assets and improving real
estate market liquidity.
Commissions, fees and other incentives on a consolidated basis were $364.4
million, an increase of $72.1 million or 24.7% for the year ended December 31,
1997, compared to the year ended December 31, 1996. The increase in these
costs is attributable both to the increase in revenue since most of the
Company's sales professionals are compensated based on revenue and to an
increasing number of sales personnel becoming entitled to commissions at a
rate above 50.0%. As a percentage of revenue, commissions fees and other
incentives were 49.9% and 50.1% in 1997 and 1996, respectively.
Operating, administrative and other on a consolidated basis was $275.7
million, an increase of $47.0 million or 20.5% for the year ended December 31,
1997, compared to the year ended December 31, 1996. This is consistent with
increased operating activity, and reflects a decrease in operating,
administrative and other as a percentage of revenue from 39.3% to 37.8%.
Merger-related and other nonrecurring charges were $12.9 million for the
year ended December 31, 1997. These charges represent $8.8 million of accrued
merger costs, $2.4 million of merger-related incentive payments to certain
sellers of Westmark Realty Advisors L.L.C. ("Westmark") and $1.7 million
related to an accelerated contingent note payment.
Consolidated interest income was $2.6 million, an increase of $1.1 million
or 72.9% for the year ended December 31, 1997, as compared to the year ended
December 31, 1996, which directly relates to increased cash balances.
Consolidated interest expense was $15.8 million, a decrease of $8.3 million
or 34.6% for the year ended December 31, 1997, as compared to the year ended
December 31, 1996. The decrease is the result of the payment of a portion of
the senior debt with the net proceeds from the Company's initial public
offering in late 1996, a reduction in interest rates due to debt refinancing
in late August 1997, and other payments during 1997.
Net provision for income tax on a consolidated basis in 1997 was $20.6
million, compared to a $44.7 million benefit for 1996. The 1997 provision is
the result of positive pre-tax income and the use of the full
17
effective tax rate, whereas the benefit in 1996 resulted primarily from the
recognition of a portion of the Company's NOL carryforwards and other deferred
tax assets by reversing the related valuation allowance. See Note 10 to the
Company's consolidated financial statements for discussion of the Company's
deferred taxes and related valuation allowances.
Extraordinary items of $1.0 million relate to the write-off of deferred loan
costs due to extinguishment of certain senior and senior subordinated debt.
The amount is net of a tax benefit of $0.7 million. There were no
corresponding charges incurred in 1996.
EBITDA was $90.1 million for the year ended December 31, 1997 as compared to
$62.0 million for the year ended December 31, 1996. 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, extraordinary
items, and income taxes.
18
Segment Operations
The Company provides integrated real estate services through four global
business units. The four units are Brokerage Services, Corporate Services,
Asset Services and Financial Services. The factors for determining the
reportable segments were based on the type of service and client. Each
business segment requires and is responsible for executing a unique marketing
and business strategy. Brokerage Services consists of commercial property
sales and leasing services. Corporate Services consists of outsourcing,
transaction management, advisory services and facilities management. Asset
Services consists of property management and related services. Financial
Services consists of investment property services (acquisitions and sales on
behalf of investors), mortgage loan origination and servicing through L.J.
Melody, investment management and advisory services through CB Richard Ellis
Investors L.L.C. ("CBRE Investors"), capital markets activities, valuation and
appraisal services and real estate market research. The following tables
summarize the revenue, cost and expenses, and operating income by operating
segment for the years ended December 31, 1998, 1997 and 1996.
Year Ended December 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(Dollars in thousands)
Brokerage Services
Revenue....................... $546,361 100.0% $423,485 100.0% $345,906 100.0%
Costs and expenses:
Commissions, fees and other
incentives................. 284,935 52.2 237,697 56.1 191,830 55.5
Operating, administrative
and other.................. 188,698 34.5 133,661 31.6 122,845 35.5
Depreciation and
amortization............... 10,820 2.0 8,200 1.9 7,092 2.0
-------- ----- -------- ----- -------- -----
Operating income.............. $ 61,908 11.3% $ 43,927 10.4% $ 24,139 7.0%
======== ===== ======== ===== ======== =====
EBITDA........................ $ 72,728 13.3% $ 52,127 12.3% $ 31,231 9.0%
======== ===== ======== ===== ======== =====
Corporate Services
Revenue....................... $ 78,671 100.0% $ 37,608 100.0% $ 25,564 100.0%
Costs and expenses:
Commissions, fees and other
incentives................. 27,921 35.5 17,596 46.8 14,286 55.9
Operating, administrative
and other.................. 46,800 59.5 17,526 46.6 10,700 41.9
Depreciation and
amortization............... 2,491 3.2 898 2.4 243 0.9
-------- ----- -------- ----- -------- -----
Operating income.............. $ 1,459 1.8% $ 1,588 4.2% $ 335 1.3%
======== ===== ======== ===== ======== =====
EBITDA........................ $ 3,950 5.0% $ 2,486 6.6% $ 578 2.3%
======== ===== ======== ===== ======== =====
Asset Services
Revenue....................... $126,322 100.0% $ 67,442 100.0% $ 44,783 100.0%
Costs and expenses:
Commissions, fees and other
incentives................. 27,046 21.4 21,852 32.5 17,416 38.9
Operating, administrative
and other.................. 84,175 66.6 39,003 57.8 21,518 48.0
Depreciation and
amortization............... 5,870 4.6 2,040 3.0 700 1.6
-------- ----- -------- ----- -------- -----
Operating income.............. $ 9,231 7.4% $ 4,547 6.7% $ 5,149 11.5%
======== ===== ======== ===== ======== =====
EBITDA........................ $ 15,101 12.0% $ 6,587 9.8% $ 5,849 13.1%
======== ===== ======== ===== ======== =====
Financial Services
Revenue....................... $283,149 100.0% $201,689 100.0% $166,815 100.0%
Costs and expenses:
Commissions, fees and other
incentives................. 107,431 37.9 87,258 43.2 68,734 41.2
Operating, administrative
and other.................. 140,251 49.5 85,559 42.5 73,736 44.2
Depreciation and
amortization............... 13,004 4.6 6,922 3.4 5,539 3.3
-------- ----- -------- ----- -------- -----
Operating income.............. $ 22,463 8.0% $ 21,950 10.9% $ 18,806 11.3%
======== ===== ======== ===== ======== =====
EBITDA........................ $ 35,467 12.6% $ 28,872 14.3% $ 24,345 14.6%
======== ===== ======== ===== ======== =====
Merger-related and other
nonrecurring charges......... $ 16,585 $ 12,924 $ -
======== ======== ========
Total operating income........ $ 78,476 $ 59,088 $ 48,429
======== ======== ========
Total EBITDA.................. $127,246 $ 90,072 $ 62,003
======== ======== ========
19
The following discussion of each of the Company's four operating segments
should be read in conjunction with Note 14 to the Consolidated Financial
Statements. Segment operating income excludes interest income, interest
expense, merger-related and other nonrecurring charges, provision for income
taxes and extraordinary items.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Brokerage Services
Revenue increased by $122.9 million or 29.0% 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 and the partial contribution from REI
and HP. The strong market resulted in higher property values, higher rental
rates and increased activity, which translated to increases in both the total
number and size of brokerage sales and lease transactions closed for the year
ended December 31, 1998, as compared to the year ended December 31, 1997.
Commissions, fees and other incentives increased by $47.2 million or 19.9% 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 52.2% for the year ended December
31, 1998 compared to 56.1% for the year 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 commission-based program. Operating, administrative, and other
increased by $55.0 million or 41.2% for the year ended December 31, 1998,
compared to the year ended December 31, 1997. The increase in the amount is
primarily a result of additional personnel requirements and business promotion
and office operations expenses, which contributed to the increase in revenue,
the integration of REI and incentive compensation based on increased operating
results. Depreciation and amortization increased by $2.6 million or 32.0% 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 REI and HP,
offset in part by the write-off of Langdon Rieder acquisition goodwill of $2.1
million in 1997.
Corporate Services
Revenue increased by $41.1 million or 109.2% for the year ended December 31,
1998, compared to the year ended December 31, 1997, primarily due to the
contribution from Koll and REI as well as the wider acceptance of real estate
management outsourcing. Commissions, fees and other incentives increased by
$10.3 million or 58.7% for the year ended December 31, 1998 compared to the
year ended December 31, 1997, but decreased as a percentage of revenue from
46.8% to 35.5% 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 $29.3 million or 167.0% for the year ended December 31, 1998,
compared to the year ended December 31, 1997, primarily related to the
acquisition of Koll, which has higher fixed operating expenses, additional
personnel requirements, business promotion expenses and the investment made in
infrastructure to expand corporate services business from the combination with
REI and HP. Depreciation and amortization increased by $1.6 million or 177.4%
for the year ended December 31, 1998, as compared to the year ended December
31, 1997, primarily related to the acquisitions of Koll, REI and HP.
Asset Services
Revenue increased by $58.9 million or 87.3% 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 acquired companies. Commissions, fees and other incentives
increased by $5.2 million or 23.8% for the year ended December 31, 1998,
compared to the year ended December 31, 1997, but decreased as a percentage of
revenue from 32.5% to 21.4% 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 $45.2 million or 115.8% for the year ended
20
December 31, 1998, compared to the year ended December 31, 1997. The increase
in amount is primarily due to the full integration of Koll and the partial
integration of REI and HP. Depreciation and amortization increased by $3.8
million or 187.7% for the year ended December 31, 1998 compared to the year
ended December 31, 1997, primarily related to the acquisitions of Koll and
REI.
Financial Services
Revenue increased by $81.5 million or 40.4% 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 contributions of REI
and HP, and growth at the mortgage banking and valuations units offset by
declines at the investment properties and investment management units.
Commissions, fees and other incentives increased by $20.2 million or 23.1% 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 levels in investment properties,
mortgage banking and valuation and appraisal services. Operating,
administrative, and other increased by $54.7 million or 63.9% 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, which contributed to the increase in revenue, and the full
integration of Koll and the partial integration of REI and HP. Depreciation
and amortization increased by $6.1 million or 87.9% 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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Brokerage Services
Revenue increased by $77.6 million or 22.4% for the year ended December 31,
1997, compared to the year ended December 31, 1996, due to the continued
improvement of the real estate market. The strong market resulted in higher
property values, higher rental rates and increased activity, which translated
to increases in both the total number and size of brokerage sales and lease
transactions closed during 1997 as compared to 1996. Commissions, fees and
other incentives increased by $45.9 million or 23.9% for the year ended
December 31, 1997 compared to the year ended December 31, 1996, primarily due
to increased revenues, which resulted in higher commission eligibility levels
and, thus, higher commissions. The increase in commissions, fees and other
incentives was greater than the increase in revenues as a result of a tiered
commission program whereby after certain eligibility criteria is achieved,
producers receive an additional premium paid annually. Operating,
administrative, and other increased by $10.8 million or 8.8% for the year
ended December 31, 1997 compared to the year ended December 31, 1996, but
decreased as a percentage of revenue from 35.5% to 31.6%. The increase in the
amount is primarily a result of additional personnel requirements and business
promotional expenses, which contributed to the increase in revenue and
incentive compensation based on increased operating results. Depreciation and
amortization increased by $1.1 million or 15.6% for the year ended December
31, 1997, as compared to the year ended December 31, 1996, primarily due to
the write-off of Langdon Rieder acquisition goodwill of $2.1 million,
partially offset by reduced depreciation due to an increase in fully
depreciated assets.
Corporate Services
Revenue increased by $12.0 million or 47.1% for the year ended December 31,
1997, compared to the year ended December 31, 1996, primarily due to the Koll
acquisition and an increase in the total number and size of corporate services
sales and lease transactions closed during 1997 compared to 1996. Commissions,
fees and other incentives increased by $3.3 million or 23.2% for the year
ended December 31, 1997 compared to the year ended December 31, 1996, but
decreased as a percentage of revenue from 55.9% to 46.8% primarily because the
base contract management fee revenues, which increased as a result of the Koll
acquisition, do not have corresponding commission expenses. Operating,
administrative, and other increased $6.8 million or 63.8% for
21
the year ended December 31, 1997, compared to the year ended December 31,
1996, primarily related to the Koll acquisition and to additional personnel
requirements and business promotional expenses which contributed to the
increase in revenue. Depreciation and amortization increased by $0.7 million
or 269.5% for the year ended December 31, 1997, as compared to the year ended
December 31, 1996, primarily related to the Koll acquisition.
Asset Services
Revenue increased by $22.7 million or 50.6% for the year ended December 31,
1997, compared to the year ended December 31, 1996. Commissions, fees and
other incentives increased by $4.4 million or 25.5% for the year ended
December 31, 1997 compared to the year ended December 31, 1996. Operating,
administrative, and other increased $17.5 million or 81.3% for the year ended
December 31, 1997 compared to the year ended December 31, 1996. Depreciation
and amortization increased by $1.3 million or 191.4% for the year ended
December 31, 1997 compared to the year ended December 31, 1996. Each of these
increases in Asset Services were primarily related to the Koll acquisition.
Financial Services
Revenue increased by $34.9 million or 20.9% for the year ended December 31,
1997 compared to the year ended December 31, 1996. The increase in revenue is
primarily due to an increase in the total number and size of investment
properties and mortgage banking transactions closed during 1997 compared to
1996, a full year of mortgage banking revenue related to the L.J. Melody
acquisition compared to six months for the same period last year and an
increase in valuation and appraisal services revenue related to heightened
real estate market liquidity, partially offset by a decrease in investment
advisory services. Commissions, fees and other incentives increased by $18.5
million or 27.0% for the year ended December 31, 1997 compared to the year
ended December 31, 1996. The increase is primarily a result of the revenue
increase and the resulting higher commission eligibility levels in investment
properties, mortgage banking and valuation and appraisal services, increased
mortgage banking commissions related to the L.J. Melody acquisition which
includes a full year of activity compared to six months for same period last
year, and mortgage banking base salary costs. Operating, administrative, and
other increased by $11.8 million or 16.0% for the year ended December 31, 1997
compared to the year ended December 31, 1996, primarily as a result of
business promotional expenses and additional personnel requirements which
contributed to the increase in revenue, and the L.J. Melody and Koll
acquisitions. Depreciation and amortization increased by $1.4 million or 25.0%
for the year ended December 31, 1997 as compared to the year ended December
31, 1996, primarily related to the L.J. Melody and Koll acquisitions.
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. In order to fund the January
1998 preferred stock repurchase, various business acquisitions and other
working capital requirements, the Company borrowed approximately $172.8
million net of discount through the issuance of senior subordinated notes and
had additional net borrowings of $47.0 million under the revolving credit
facility, during the year ended December 31, 1998. As a result, the Company's
total indebtedness at December 31, 1998 was $373.7 million, excluding current
maturities. The Company's EBITDA, excluding merger-related and other
nonrecurring costs, was $127.2 million and $90.1 million for the year ended
December 31, 1998 and 1997, respectively.
Net cash provided by operating activities was $76.6 million in 1998 compared
to $80.8 million in 1997. The change is primarily due to an increase in
international receivables arising from acquisitions in 1998 and changes in
components of operating assets and liabilities. Net cash provided by operating
activities was $80.8 million in 1997, compared to $65.7 million in 1996. The
increase resulted primarily from an improvement in operating income, before
non-cash charges and benefits and changes in components of operating assets
and liabilities.
22
Net cash used in investing activities was $223.5 million in 1998 compared to
$18.0 million in 1997. The increase primarily resulted from the acquisitions
of businesses including REI and HP, an increase in purchases of property and
equipment and additional supplemental purchase price payments in connection
with a 1995 acquisition. Net cash used in investing activities increased to
$18.0 million in 1997 compared to $10.9 million in 1996 as a result of
additional supplemental purchase price payments to the CBRE Investors and L.J.
Melody sellers, an increase in purchases of property and equipment and an
increase in short-term investments (included in other current assets), offset
by cash acquired from the Koll acquisition net of related acquisition costs.
Net cash provided by financing activities was $119.4 million in 1998
compared to cash used in financing activities of $65.0 million in 1997. The
increase primarily resulted from an increase in net borrowings from the
revolving credit facility and issuance of the senior subordinated notes offset
in part by the payment for the repurchase of the Company's preferred stock and
periodic repayments of the revolving credit facility. Net cash used in
financing activities was $65.0 million in 1997 compared to $28.5 million in
1996. The increase primarily resulted from increases in repayments of the
senior revolving credit line, senior term loans, and the senior subordinated
term loans, offset by borrowings from the new revolving credit facility.
As of December 31, 1998, the Company had $386.0 million outstanding in long-
term indebtedness, consisting primarily of acquisition debt. Annual aggregate
maturities of long-term debt as of December 31, 1998 are as follows: 1999--
$12.3 million; 2000--$9.2 million; 2001--$2.0 million; 2002--$5.5 million;
2003--$167.0 million; and $190.0 million thereafter.
In May 1998, the Company amended its revolving credit facility with a bank
syndicate to provide a committed line of credit of 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. The
amount outstanding under this facility was $167.0 million as of December 31,
1998. Interest rate alternatives include Bank of America's reference rate plus
0.50% and LIBOR plus 1.50%. The weighted average rate on amounts outstanding
at December 31, 1998 was 6.89%.
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.
In connection with the 1995 Westmark acquisition, the sellers were entitled
to a supplemental purchase price based on the operating results of Westmark
payable over a period of six years and subject to a maximum aggregate payment
of $18.0 million. In August 1997 the Company agreed to buy out the Westmark
supplemental purchase price and a related incentive plan for $11.1 million and
$2.4 million, respectively. The Company paid $4.0 million of the supplemental
purchase price on August 15, 1997. The remaining payments were made on January
15, 1998 and February 14, 1998 for $5.0 million and $2.1 million,
respectively. The supplemental purchase price has been recorded as additional
goodwill and is being amortized over Westmark goodwill's remaining estimated
useful life, initially 30 years. The related incentive plan buyout was paid on
August 15, 1997 and is included in merger-related and other nonrecurring
charges in the accompanying statement of operations. In October 1997 the
Company paid the outstanding balance of the senior and contingent notes
related to the L.J. Melody acquisition for $1.1 million and $3.0 million,
respectively. Of this amount, $1.7 million was related to the acceleration of
the contingent note and is included in merger-related and other nonrecurring
charges in the accompanying statements of operations. Effective April 30,
1997, the Company amended the term of its inventoried property loan to extend
the settlement date to March 2, 1999. All other terms of the agreement remain
in effect. In January of 1999, the inventoried property was sold and the
related loan was paid off.
Effective October 1996, a dividend on the Company's preferred stock accrued
from October 1, 1996 through December 1, 1997, and resulted in a cost of $1.0
million per quarter. In January 1998 the Company borrowed approximately $78.0
million to repurchase all 4.0 million shares of its preferred stock. The total
cost to purchase
23
the preferred stock was $77.4 million, including $5.0 million of previously
accrued dividends and certain stock options. This transaction reduced income
available to common stockholders in the first quarter of 1998 by
$32.3 million, which represents the excess of the redemption price over book
value and is considered, in accordance with GAAP, a dividend to preferred
stockholders for the purpose of calculating earnings per share.
The Company expects to have capital expenditures ranging from $25.0 million
to $30.0 million in 1999. The Company expects to use net cash provided by
operating activities for the next several years primarily to fund capital
expenditures primarily for computer related purchases, acquisitions, earnout
payments, and to make required principal payments under the Company's
outstanding indebtedness. Material future acquisitions that require cash may
require new sources of capital such as an expansion of the amended revolving
credit facility or issuance of additional equity. 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 for the
foreseeable future and in any event for at least the next twelve months.
In October 1998, the Company offered all employees under the 1990 Stock
Option Plan who hold options that expire 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 the 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 405,000 shares were issued under this offering for a total loan
amount of $5.3 million.
On October 15, 1998 the Company announced that its board of directors had
approved a repurchase program under which it would purchase up to $10.0
million of its common stock during the period of October 16, 1998 through
December 31, 1998. During this period, the Company purchased 488,900 shares of
Common Stock for approximately $8.9 million.
Year 2000 Issues Update
Introduction
The Year 2000 ("Y2K") issue exists because many computer systems and
applications currently use only two digits to designate a year, which may
cause date-sensitive systems to recognize the year 2000 as 1900 or not at all.
The Company's proprietary and client accounting systems, other information
technology ("IT") systems and embedded (elevator, HVAC, and other non-IT)
systems are all potentially subject to problems related to the inability of
such systems to appropriately interpret the upcoming calendar year "2000" and
beyond.
State of Readiness
The Company has assessed and continues to assess the impact of the Y2K on IT
and non-IT systems and is in the process of completing the replacement or
upgrade of the affected hardware and software. The Company has created an
integration team to facilitate testing all of its significant software and to
determine whether embedded technology is Y2K compliant. The Company believes
that Y2K issues for certain of its acquired businesses outside of the United
States, including those in Asia, are more serious than Y2K issues in the
United States and Europe but are not material. The local management and the
integration team are developing compliance plans for these acquired business
locations. Although there can be no assurances, the Company believes that its
proprietary accounting systems, information technology and embedded systems
will be Y2K compliant by the end of 1999.
24
Costs to Address the Year 2000 Issue
To date, the Company estimates that it has spent approximately $6.0 million
to address the Y2K issue which includes replacing and upgrading the affected
hardware and software. Costs incurred to replace systems will be capitalized.
The Company estimates approximately $5.0 million of additional costs to fully
address the Y2K issue. The Company does not track the cost and time that its
own internal employees spend on the Y2K project.
Risks Presented by the Year 2000 Issue
The Company relies on third parties for goods and services. The inability of
these third parties to conduct their business for a significant period of time
due to the Y2K issue could have a material adverse impact on the Company's
operations. In addition, certain of the Company's clients require the Company
to utilize client-provided IT systems in connection with the Company's
provision of services. Failure of any of these client-provided systems could
disrupt the Company's operations with respect to the clients involved. Due to
the Company's inability to complete an assessment of risk with respect to
third-party suppliers and clients, the Company cannot conclusively determine
that their occurrence will not have a material adverse impact on the Company's
results of operations, liquidity or financial condition. At this time, the
Company believes its most reasonably likely worst case scenarios include:
temporary failure of one or more infrastructure services provided by third-
party suppliers (including utilities and transportation); loss of real-time
processing capability by the Company's internal information systems; and
interruption of commerce with customers or suppliers that experience Y2K-
related failures within their businesses. In a worst case scenario such
occurrences could materially and adversely affect the Company's results of
operations, liquidity and financial condition.
Contingency Plans
The project teams working with each of the Company's systems are responsible
for developing two types of contingency plans to address these risks. One type
manages the risks of Y2K-related failure. This employs iterative planning that
identifies and quantifies risks and responds by altering the original plan to
avoid the risks or reduce their impact or their probability of occurring. The
other type of contingency plan manages recovery from a Y2K-related failure by
identifying the potential failures; assessing their impacts; evaluating and
selecting operational alternatives; planning the implementation of
alternatives; and facilitating the eventual restoration of normal operations.
The Company has plans for temporary alternatives in the event that its
internal accounting systems fail and transfer data and functionality of any
failed client accounting systems to a working backup system, but such plans
will not be completed until the third quarter of 1999.
Euro Conversion Disclosure
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 six percent of the Company's 1998 business was transacted in the
participating member countries. The Company is currently using the legacy
currencies to conduct business in these member countries.
The Company is in the process of replacing or upgrading the affected
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
On October 20, 1998 the Company, through L.J. Melody, purchased Carey,
Brumbaugh, Starman, Phillips, and Associates, Inc. ("Carey, Brumbaugh"), 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 beginning October 1999. Approximately $0.2 million of the $2.4
million notes will be accounted for as deferred cash compensation to certain
key executives. The acquisition was accounted for as a purchase. The purchase
price
25
has been largely allocated to intangibles and goodwill which will be amortized
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. On a preliminary basis, the purchase price has been
allocated to intangibles and goodwill which will be amortized 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 allocated to intangibles and goodwill which will be amortized on a
straight line basis over their estimated useful lives of 5 and 30 years,
respectively.
On July 7, 1998 the Company acquired the business of Hillier Parker, a
commercial property services partnership operating in the United Kingdom. The
acquisition was accounted for as a purchase. The purchase price for Hillier
Parker included approximately $63.9 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 Hillier Parker employees with a potential payout over
three years of approximately $12.5 million and assumed various annuity
obligations of approximately $15.0 million. On a preliminary basis, the
purchase price has largely been allocated to goodwill which will be 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 interest in
the combined enterprise is $5.7 million.
On May 31, 1998 the Company acquired Mathews Click and Associates ("Mathews
Click"), a property sales, leasing, and management firm, for approximately
$10.0 million in cash and potential supplemental payments of $1.9 million
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, which are contingent upon operating results, will be
allocated to intangibles and goodwill which will be 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 $2.7 million in notes
bearing interest at 9.0% with three annual payments beginning May 1999. The
acquisition was accounted for as a purchase. Approximately $0.3 million of the
$2.7 million notes will be 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 will be 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 will be amortized on a straight line basis over
their 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 United Kingdom). The acquisition was accounted for as a
purchase. On a preliminary basis, the purchase price has largely been
allocated to goodwill, which will be amortized on a straight line basis over
an estimated useful life of 30 years. The purchase price for REI was
approximately $103.0 million of which approximately $52.7 million was paid in
cash and notes and approximately $50.3 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
26
integration of REI's operations and systems into the Company's. For the year
ended December 31, 1997, REI had revenues and EBITDA of approximately $118.0
million and $11.7 million, respectively.
On February 1, 1998 the Company, through L.J. Melody, acquired all of the
issued and outstanding stock of Cauble and Company of Carolina ("Cauble"), 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 allocated to intangibles and goodwill, which will be 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 has 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 beginning 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 will be 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 will be 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 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 will be earned as assets within the funds
are sold and is included, net of amortization, in goodwill and other
intangible assets, respectively, on the accompanying balance sheet. Goodwill
is being amortized on a straight line basis over 30 years. In the third
quarter of 1997 CB Richard Ellis 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 merger did not include several other entities which use the Koll name,
including, but not limited to, Koll Construction, Koll Real Estate Group (the
development and investment company) and Koll International (resorts and
recreational developments).
Effective July 1, 1996, CB Commercial Mortgage Company, Inc. ("CB
Mortgage"), a wholly-owned subsidiary of the Company, acquired all of the
outstanding capital stock of L.J. Melody & Company. The purchase consideration
for L.J. Melody was $15.0 million, including a $2.3 million contingent note to
the principal seller bearing 10.0% interest with principal payments starting
in 1998, $9.0 million in cash and $3.7 million in additional senior notes to
the sellers. The notes bore interest of 10.0% per annum, with maturities
through July 2001. The $2.3 million note has been accounted for as
compensation over the term of the note as the payment of this note was
contingent upon the principal seller's continued employment with the Company.
In October 1997 the Company paid the outstanding balance of the senior and
contingent notes related to the L.J. Melody acquisition of $1.1 million and
$3.0 million, respectively. Of this amount, $1.7 million was related to the
acceleration of a contingent note and is included in merger-related and other
nonrecurring charges in the accompanying statements of operations.
The L.J. Melody acquisition was accounted for as a purchase. The Company
allocated approximately $3.7 million of the total purchase price to
identifiable intangible assets, consisting of loan servicing and asset
management contracts, trade name, a covenant not to compete and other
intangibles. The remaining $9.0 million and a $1.5 million deferred tax
liability resulting from the acquisition were recorded to goodwill. The
intangibles are being amortized over their estimated useful lives or the lives
of the underlying contracts, as applicable, over periods ranging from three to
13 years. Goodwill is being amortized on a straight line basis over 30 years.
27
Litigation
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 have filed an appeal of the judgment. The Company believes that it has
adequate insurance coverage for the compensatory portion of the judgment and
adequate reserves for the punitive portion, as well as potential indemnity
claims from Prudential for the entire judgment.
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 $6.5 million in general and 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. Based on available reserves, 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.
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 $70.8 million as of
December 31, 1998, corresponding to $24.8 million of the Company's $53.3
million in net deferred tax assets before valuation allowance.
The ability of the Company to utilize NOLs has been 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 1998 and in each subsequent year.
The amount of NOLs is, in any event, subject to some uncertainty until the
statute of limitations lapses after their utilization to offset taxable
income.
New Accounting Pronouncements
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the quarter ended December 31, 1998.
SFAS 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 financial statements.
28
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5, which is effective for financial statements for fiscal
years beginning after December 15, 1998, requires costs of start-up activities
and organization costs to be expensed as incurred. The adoption of this
statement is not expected to have a material impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board 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.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997. 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. Based on derivative instruments outstanding, SFAS
No. 133 is not anticipated to have a significant impact on earnings or other
components of comprehensive income.
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.
29
Quarterly Results of Operations and Other Financial Data
The following table sets forth certain unaudited consolidated statement of
operations data for each of the Company's last twelve quarters and the
percentage of the Company's revenues represented by each line item reflected
in each consolidated income statement. In the opinion of management, this
information has been presented on the same basis as the consolidated financial
statements included in Item 8, and includes all adjustments, consisting only
of normal recurring adjustments and accruals, that the Company considers
necessary for a fair presentation. 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.
1998 1997
--------------------------------------- --------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
-------- --------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Results of
Operations:
Revenue........... $330,289 $ 273,803 $255,267 $175,144 $260,682 $177,520 $157,958 $134,064
Costs and expenses:
Commissions, fees
and other
incentives....... 136,692 113,559 113,368 83,714 126,687 87,588 82,521 67,607
Operating,
administrative
and other........ 145,594 124,309 111,063 78,958 90,107 69,046 60,206 56,390
Merger-related and
other
nonrecurring
charges.......... - - 16,585 - - 12,924 - -
Depreciation and
amortization..... 10,099 9,337 7,427 5,322 5,788 6,098 3,053 3,121
-------- --------- -------- -------- -------- -------- -------- --------
Operating income... 37,904 26,598 6,824 7,150 38,100 1,864 12,178 6,946
Interest income.... 1,086 703 538 727 639 740 587 632
Interest expense... 9,688 9,628 7,410 4,321 3,773 4,158 4,104 3,745
-------- --------- -------- -------- -------- -------- -------- --------
Income (loss)
before provision
(benefit) for
income tax........ 29,302 17,673 (48) 3,556 34,966 (1,554) 8,661 3,833
Provision (benefit)
for income tax.... 15,669 7,534 1,132 1,591 15,772 (569) 3,795 1,560
Reduction of
valuation
allowances........ - - - - - - - -
-------- --------- -------- -------- -------- -------- -------- --------
Net provision
(benefit) for
income tax........ 15,669 7,534 1,132 1,591 15,772 (569) 3,795 1,560
-------- --------- -------- -------- -------- -------- -------- --------
Income (loss)
before
extraordinary
items............. 13,633 10,139 (1,180) 1,965 19,194 (985) 4,866 2,273
Extraordinary
items, net........ - - - - - 951 - -
-------- --------- -------- -------- -------- -------- -------- --------
Net income (loss).. $ 13,633 $ 10,139 $ (1,180) $ 1,965 $ 19,194 $ (1,936) $ 4,866 $ 2,273
======== ========= ======== ======== ======== ======== ======== ========
Other Financial
Data:
EBITDA............. $ 48,003 $ 35,935 $ 30,836 $ 12,472 $ 43,888 $ 20,886 $ 15,231 $ 10,067
Net cash provided
by (used in)
operating
activities........ $ 49,528 $ 27,798 $ 35,011 $(35,723) $ 55,055 $ 22,328 $ 19,218 $(15,766)
Net cash (used in)
provided by
investing
activities........ $(23,724) $(117,355) $(59,998) $(22,443) $ (7,702) $ 330 $ (803) $ (9,843)
Net cash (used in)
provided by
financing
activities........ $(29,372) $ 71,188 $ 47,087 $ 30,535 $(43,795) $(29,314) $ (3,512) $ 11,657
1996
--------------------------------------
Dec. 31 Sept. 30 June 30 March 31
-------- -------- -------- --------
(Dollars in thousands)
Results of Operations:
Revenue............................... $192,205 $147,168 $130,954 $112,741
Costs and expenses:
Commissions, fees and other
incentives........................... 96,801 74,196 66,262 55,007
Operating, administrative and other... 69,603 56,042 53,594 49,560
Merger-related and other nonrecurring
charges.............................. - - - -
Depreciation and amortization......... 3,825 3,431 3,038 3,280
-------- -------- -------- --------
Operating income....................... 21,976 13,499 8,060 4,894
Interest income........................ 468 286 354 395
Interest expense....................... 6,240 6,196 5,759 5,928
-------- -------- -------- --------
Income (loss) before provision
(benefit) for income tax.............. 16,204 7,589 2,655 (639)
Provision (benefit) for income tax..... 6,550 4,220 438 (48)
Reduction of valuation allowances...... (15,500) (40,400) - -
-------- -------- -------- --------
Net provision (benefit) for income
tax................................... (8,950) (36,180) 438 (48)
-------- -------- -------- --------
Income (loss) before extraordinary
items................................. 25,154 43,769 2,217 (591)
Extraordinary items, net............... - - - -
-------- -------- -------- --------
Net income (loss)...................... $ 25,154 $ 43,769 $ 2,217 $ (591)
======== ======== ======== ========
Other Financial Data:
EBITDA................................. $ 25,801 $ 16,930 $ 11,098 $ 8,174
Net cash provided by (used in)
operating activities.................. $ 41,524 $ 22,150 $ 13,865 $(11,845)
Net cash (used in) provided by
investing activities.................. $ (1,389) $ (9,401) $ 1,768 $ (1,884)
Net cash (used in) provided by
financing activities.................. $(15,710) $(15,297) $ (4,306) $ 6,808
30
As a Percentage of Revenues
---------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- -------- ------- -------- ------- --------
Results of Operations:
Revenue................ 100.0% 100.0% 100.0 % 100.0% 100.0% 100.0 % 100.0% 100.0%
Costs and expenses:
Commissions, fees and
other incentives...... 41.4 41.5 44.4 47.8 48.6 49.4 52.2 50.4
Operating,
administrative and
other................. 44.1 45.4 43.5 45.1 34.6 38.9 38.1 42.1
Merger-related and
other nonrecurring
charges............... - - 6.5 - - 7.3 - -
Depreciation and
amortization.......... 3.1 3.4 2.9 3.0 2.2 3.4 1.9 2.3
----- ----- ----- ----- ----- ----- ----- -----
Operating income........ 11.4 9.7 2.7 4.1 14.6 1.0 7.8 5.2
Interest income......... 0.3 0.3 0.2 0.4 0.2 0.4 0.3 0.5
Interest expense........ 2.9 3.5 2.9 2.5 1.4 2.3 2.6 2.8
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
provision (benefit) for
income tax............. 8.8 6.5 - 2.0 13.4 (0.9) 5.5 2.9
Provision for income
tax.................... 4.7 2.8 0.4 0.9 6.0 (0.3) 2.4 1.2
Reduction of valuation
allowances............. - - - - - - - -
----- ----- ----- ----- ----- ----- ----- -----
Net provision (benefit)
for income tax......... 4.7 2.8 0.4 0.9 6.0 (0.3) 2.4 1.2
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
extraordinary items.... 4.1 3.7 (0.4) 1.1 7.4 (0.6) 3.1 1.7
Extraordinary items,
net.................... - - - - - 0.5 - -
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 4.1% 3.7% (0.4)% 1.1% 7.4% (1.1)% 3.1% 1.7%
===== ===== ===== ===== ===== ===== ===== =====
As a Percentage of Revenues
---------------------------------
1996
---------------------------------
Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- --------
Results of Operations:
Revenue.................................... 100.0% 100.0% 100.0% 100.0 %
Costs and expenses:
Commissions, fees and other incentives..... 50.4 50.4 50.6 48.8
Operating, administrative and other........ 36.2 38.1 40.9 44.0
Merger-related and other nonrecurring
charges................................... - - - -
Depreciation and amortization.............. 2.0 2.3 2.3 2.9
----- ----- ----- -----
Operating income............................ 11.4 9.2 6.2 4.3
Interest income............................. 0.2 0.2 0.3 0.3
Interest expense............................ 3.2 4.2 4.4 5.2
----- ----- ----- -----
Income (loss) before provision (benefit) for
income tax................................. 8.4 5.2 2.1 (0.6)
Provision for income tax.................... 3.4 2.9 0.3 0.0
Reduction of valuation allowances........... (8.1) (27.5) - -
----- ----- ----- -----
Net provision (benefit) for income tax...... (4.7) (24.6) 0.3 0.0
----- ----- ----- -----
Income (loss) before extraordinary items.... 13.1 29.8 1.8 (0.6)
Extraordinary items, net.................... - - - -
----- ----- ----- -----
Net income (loss)........................... 13.1% 29.8% 1.8% (0.6)%
===== ===== ===== =====
31
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 20.0% of the Company's
business is transacted in local currencies of foreign countries. The Company
attempts to manage its exposure primarily by balancing monetary assets and
liabilities, and maintaining cash positions only at levels necessary for
operating purposes. 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. The Company does not engage in any speculative
activities.
In 1998, the Company entered into two forward contracts amounting to
approximately $15.0 million, and two option contracts amounting to
approximately $22.8 million to hedge the risk associated with fluctuations in
foreign currency exchange rates relating to certain international
acquisitions. The duration of these contracts ranged from ten days to two
months. The results of these hedging activities were not material. At December
31, 1998, the Company had no outstanding contracts.
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 70 basis points (approximately 10.0% of the Company's weighted-average
variable rate at year-end), the net impact would be a decrease of $1.4 million
on annual pre-tax income and cash flow. The Company's fixed and variable long-
term debt at December 31, 1998 consisted of the following:
LIBOR Bank Commercial
Fixed Plus Prime Sterling LIBOR Base Rate Paper Borrowing
Year of Maturity Rate 1.5% Plus 0.5% Minus 1.5% Plus 2.0% Rate plus 3.5% Total
---------------- -------- -------- --------- -------------- --------- --------------- --------
1999.................... $ 4,375 $ - $ - $ - $ 875 $7,093 $ 12,343
2000.................... 8,346 - - - 875 - 9,221
2001.................... 1,841 - - - 125 - 1,966
2002.................... 29 - - 5,439 - - 5,468
2003.................... 12 165,000 2,000 - - - 167,012
Thereafter(1)........... 190,024 - - - - - 190,024
-------- -------- ------ ------ ------ ------ --------
Total................. $204,627 $165,000 $2,000 $5,439 $1,875 $7,093 $386,034
======== ======== ====== ====== ====== ====== ========
Weighted Average
Interest Rate.......... 9.02% 6.87% 8.25% 4.45% 9.75% 9.09% 8.04%
======== ======== ====== ====== ====== ====== ========
- --------
(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 $177.2 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, 1998.
32
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ 34
Consolidated Balance Sheets as of December 31, 1998 and 1997............ 35
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996.................................................... 36
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................... 37
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1998, 1997 and 1996................................. 38
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996....................................... 38
Notes to Consolidated Financial Statements.............................. 39
SCHEDULES SUPPORTING THE CONSOLIDATED FINANCIAL STATEMENTS
Schedule II--Valuation and Qualifying Accounts.......................... 61
Exhibit 12--Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends.................................................... 62
All other schedules and exhibits are not submitted because either they are
not applicable, not required or the information required is included in the
Consolidated Financial Statements, including the notes thereto.
33
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) and subsidiaries as of December
31, 1998, and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit), comprehensive income and cash flows for each
of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit 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. and subsidiaries as of December 31, 1998, and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
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 15, 1999
34
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
December 31,
--------------------
1998 1997
--------- ---------
ASSETS
------
Current Assets:
Cash and cash equivalents.............................. $ 19,551 $ 47,181
Receivables, less allowance of $13,348 and $8,980 for
doubtful accounts at December 31, 1998 and 1997,
respectively.......................................... 131,512 77,358
Deferred taxes......................................... 3,529 2,890
Prepaid expenses....................................... 13,459 9,142
Other assets........................................... 8,353 8,719
--------- ---------
Total current assets................................. 176,404 145,290
Property and equipment, net.............................. 58,366 50,309
Goodwill, net of accumulated amortization of $25,060 and
$13,561 at December 31, 1998 and 1997................... 445,124 196,358
Other intangible assets, net of accumulated amortization
of $268,497 and $261,519 at December 31, 1998 and 1997.. 63,913 43,026
Prepaid pension expenses................................. 28,241 -
Deferred taxes........................................... 23,100 34,967
Investments in and advances to unconsolidated
subsidiaries............................................ 31,633 7,958
Other assets, net........................................ 30,111 22,192
--------- ---------
Total assets......................................... $ 856,892 $ 500,100
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Compensation and employee benefits..................... $ 66,245 $ 55,712
Accounts payable and accrued expenses.................. 105,027 57,032
Reserve for bonus and profit sharing................... 39,270 33,538
Current maturities of long-term debt................... 12,343 4,679
Current portion of capital lease obligations........... 2,862 1,655
--------- ---------
Total current liabilities............................ 225,747 152,616
Long-term debt, less current maturities:
Senior term loans...................................... 183,502 136,551
Senior subordinated notes, less unamortized discount of
$2,099 at December 31, 1998........................... 172,901 -
Other long-term debt................................... 17,288 9,722
--------- ---------
Total long-term debt................................. 373,691 146,273
Other long-term liabilities.............................. 60,737 35,768
--------- ---------
Total liabilities.................................... 660,175 334,657
Minority interest........................................ 5,875 7,672
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, 4,000,000 shares
outstanding as of December 31, 1997................... - 40
Common stock, $.01 par value, 20,636,134 and 18,768,200
shares outstanding as of December 31, 1998 and 1997,
respectively.......................................... 211 188
Additional paid-in capital............................. 349,796 333,981
Notes receivable from sale of stock.................... (5,654) (5,956)
Accumulated deficit.................................... (145,767) (170,324)
Currency translation adjustment........................ 1,139 (158)
Treasury stock, 488,900 shares outstanding as of
December 31, 1998..................................... (8,883) -
--------- ---------
Total stockholders' equity........................... 190,842 157,771
--------- ---------
Total liabilities and stockholders' equity........... $ 856,892 $ 500,100
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
35
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
Revenue.................................... $1,034,503 $ 730,224 $ 583,068
Costs and expenses:
Commissions, fees and other incentives... 447,333 364,403 292,266
Operating, administrative and other...... 459,924 275,749 228,799
Merger-related and other nonrecurring
charges................................. 16,585 12,924 -
Depreciation and amortization............ 32,185 18,060 13,574
---------- ---------- ----------
Operating income........................... 78,476 59,088 48,429
Interest income............................ 3,054 2,598 1,503
Interest expense........................... 31,047 15,780 24,123
---------- ---------- ----------
Income before provision (benefit) for
income tax................................ 50,483 45,906 25,809
Provision for income tax................... 25,926 20,558 11,160
Reduction of valuation allowances.......... - - (55,900)
---------- ---------- ----------
Net provision (benefit) for income tax..... 25,926 20,558 (44,740)
---------- ---------- ----------
Income before extraordinary items.......... 24,557 25,348 70,549
Extraordinary items, net................... - 951 -
---------- ---------- ----------
Net income................................. $ 24,557 $ 24,397 $ 70,549
========== ========== ==========
Preferred stock dividend................... $ - $ 4,000 $ 1,000
========== ========== ==========
Deemed dividend on preferred stock......... $ 32,273 $ - $ -
========== ========== ==========
Net income (loss) applicable to common
stockholders.............................. $ (7,716) $ 20,397 $ 69,549
========== ========== ==========
Basic earnings (loss) per share............ $ (0.38) $ 1.34 $ 5.05
========== ========== ==========
Weighted average shares outstanding for
basic earnings (loss) per share........... 20,136,117 15,237,914 13,783,882
========== ========== ==========
Diluted earnings (loss) per share.......... $ (0.38) $ 1.28 $ 4.99
========== ========== ==========
Weighted average shares outstanding for
diluted earnings (loss) per share......... 20,136,117 15,996,929 14,126,636
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
36
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
-----------------------------
1998 1997 1996
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 24,557 $ 24,397 $ 70,549
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization excluding
deferred financing costs................... 32,185 18,060 13,574
Amortization of deferred financing costs.... 1,184 983 2,840
Extraordinary items, net.................... - 951 -
Equity interest in (earnings) loss of
unconsolidated subsidiaries................ (3,443) 113 (145)
Provision for litigation, doubtful accounts
and other.................................. 5,185 2,421 9,543
Deferred interest........................... - - 6,927
Deferred compensation....................... 14,738 6,121 2,159
Deferred taxes.............................. 14,394 17,122 (46,128)
Increase in receivables....................... (24,846) (6,073) (14,378)
Decrease (increase) in prepaid expenses and
other assets................................. 317 (10,634) 794
Increase in compensation and employee benefits
payable...................................... 7,782 19,772 19,793
Increase (decrease) in accounts payable and
accrued expenses............................. 2,615 2,903 (696)
Increase in other operating liabilities....... 1,946 4,699 862
--------- -------- --------
Net cash provided by operating
activities............................... 76,614 80,835 65,694
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (29,715) (9,927) (3,002)
Proceeds from collections on notes
receivable................................... 362 2,236 2,726
Increase in intangibles and goodwill.......... (14,595) (8,478) (1,321)
Acquisitions of businesses including net
assets acquired, intangibles and goodwill.... (189,895) 3,216 (8,625)
Other investing activities, net............... 10,323 (5,065) (684)
--------- -------- --------
Net cash used in investing activities..... (223,520) (18,018) (10,906)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior revolving credit line.... - 16,000 21,000
Repayment of senior revolving credit line..... - (16,000) (21,000)
Proceeds from senior term loans............... 315,000 155,000 -
Repayment of senior term loans................ (268,000) (90,415) (94,978)
Repayment of other loans...................... (14,701) (55,976) (2,379)
Proceeds from senior subordinated term loan... 172,788 - -
Repayment of senior subordinated term loan.... - (65,872) (5,044)
Payment of dividends payable.................. (5,000) - -
Repurchase of preferred stock................. (72,331) - -
Repurchase of common stock.................... (8,883) - -
Repayment of capital leases................... (1,655) (2,773) (2,945)
Minority interest payments.................... (2,902) (1,990) -
Other financing activities, net............... 5,122 (2,938) 76,841
--------- -------- --------
Net cash provided by (used in) financing
activities............................... 119,438 (64,964) (28,505)
--------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (27,468) (2,147) 26,283
Cash and cash equivalents, at beginning of
period......................................... 47,181 49,328 23,045
Effect of exchange rate changes on cash......... (162) - -
--------- -------- --------
Cash and cash equivalents, at end of period..... $ 19,551 $ 47,181 $ 49,328
========= ======== ========
SUPPLEMENTAL DATA:
Cash paid during the year for:
Interest (none capitalized)................... $ 27,528 $ 14,073 $ 25,899
Income taxes, net of refunds.................. $ 3,395 $ 2,736 $ 1,284
Non-cash investing and financing activities:
Equipment acquired under capital leases....... $ - $ 2,299 $ 1,701
The accompanying notes are an integral part of these consolidated financial
statements.
37
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
Notes Accumulated
Additional receivable other
Preferred Common paid-in from sale Accumulated comprehensive Treasury
stock stock capital of stock deficit income stock Total
--------- ------ ---------- ---------- ----------- ------------- -------- ---------
Balance, December 31,
1995................... $ 40 $ 93 $110,326 $ - $(265,270) $ 123 $ - $(154,688)
Net income.............. - - - - 70,549 - - 70,549
Common stock issued for
deferred compensation
and other incentives... - 8 7,660 (5,109) - - - 2,559
Common stock options
exercised.............. - - 100 - - - - 100
Preferred dividend
accrual................ - - (1,000) - - - - (1,000)
Net proceeds from
initial public
offering............... - 32 79,399 - - - - 79,431
Benefit of permanent
deferred tax asset..... - - 1,541 - - - - 1,541
Foreign currency
translation loss....... - - - - - (7) - (7)
---- ---- -------- ------- --------- ------ ------- ---------
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 Hillier Parker
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
==== ==== ======== ======= ========= ====== ======= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Year ended December 31,
------------------------
1998 1997 1996
------- ------- -------
Net income............................................ $24,557 $24,397 $70,549
Other comprehensive income............................ 1,297 (274) (7)
------- ------- -------
Comprehensive income.................................. $25,854 $24,123 $70,542
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
38
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Organization and Acquisitions
Organization. CB Richard Ellis Services, Inc. ("CB Richard Ellis") or (the
"Company") is a holding company that conducts its operations primarily through
its subsidiaries CB Richard Ellis, Inc., CB Commercial Limited (formerly REI
Limited and the United Kingdom holding company for the various Richard Ellis
companies operating outside the United Kingdom and the United States), L.J.
Melody & Company ("L.J. Melody"), CB Richard Ellis Investors, L.L.C. and CB
Hillier Parker Limited. On November 25, 1996 CB Richard Ellis completed an
initial public offering (the "Offering") of 4,347,000 shares of common stock,
par value $.01 per share (the "Common Stock"). The net proceeds from the
Offering of $79.5 million were used to repay a portion of CB Richard Ellis'
then outstanding senior secured indebtedness and senior subordinated
indebtedness.
Nature of Operations. The Company provides a full range of real estate
services worldwide to commercial real estate tenants, owners and investors
through approximately 230 offices worldwide including but not limited to the
United States, Argentina, Australia, Brazil, Belgium, Canada, France, Germany,
Hong Kong, India, Italy, the Netherlands, New Zealand, Peoples Republic of
China, Portugal, Singapore, Spain, Switzerland, Taiwan, and the United
Kingdom. The Company's services include (i) brokerage services whereby the
Company facilitates the sale and lease of properties ("Brokerage Services");
(ii) transaction management, consulting services and facilities management
services to corporate real estate users ("Corporate Services"); (iii) property
management and related services ("Asset Services"); and (iv) capital market
activities, including mortgage banking, brokerage and servicing, investment
management and advisory services, investment property transactions (including
acquisitions and sales on behalf of investors), real estate market research
and valuation and appraisal services (collectively "Financial 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 governmental entities, and individuals.
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.
Acquisitions. On October 20, 1998 the Company, through L.J. Melody,
purchased Carey, Brumbaugh, Starman, Phillips, and Associates, Inc. ("Carey,
Brumbaugh"), 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 beginning October 1999. Approximately $0.2 million of
the $2.4 million notes will be accounted for as deferred cash compensation to
certain key executives. The acquisition was accounted for as a purchase. The
purchase price has been largely be allocated to intangibles and goodwill which
will be amortized 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. On a preliminary basis, the purchase price has been
allocated to intangibles and goodwill which will be amortized over their
estimated useful lives ranging up to 30 years.
39
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 allocated to intangibles and goodwill which will be amortized on a
straight line basis over their estimated useful lives of 5 and 30 years,
respectively.
On July 7, 1998 the Company acquired the business of Hillier Parker, a
commercial property services partnership operating in the United Kingdom. The
acquisition was accounted for as a purchase. The purchase price for Hillier
Parker included approximately $63.9 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 Hillier Parker employees with a potential payout over
three years of approximately $12.5 million and assumed various annuity
obligations of approximately $15.0 million. On a preliminary basis, the
purchase price has largely been allocated to goodwill which will be 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 interest in
the combined enterprise is $5.7 million.
On May 31, 1998 the Company acquired Mathews Click and Associates ("Mathews
Click"), a property sales, leasing, and management firm, for approximately
$10.0 million in cash and potential supplemental payments of $1.9 million
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, which are contingent upon operating results, will be
allocated to intangibles and goodwill which will be 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 $2.7 million in notes
bearing interest at 9.0% with three annual payments beginning May 1999. The
acquisition was accounted for as a purchase. Approximately $0.3 million of the
$2.7 million notes will be 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.
Approximately $2.4 million of the $2.7 million will be 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 will be amortized on a straight line basis over
their 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 United Kingdom). The acquisition was accounted for as a
purchase. On a preliminary basis, the purchase price has largely been
allocated to goodwill, which will be amortized on a straight line basis over
an estimated useful life of 30 years. The purchase price for REI was
approximately $103.0 million of which approximately $52.7 million was paid in
cash and notes and approximately $50.3 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. For the year ended December 31,
1997, REI had revenues and EBITDA of approximately $118.0 million and $11.7
million, respectively.
On February 1, 1998 the Company, through L.J. Melody, acquired all of the
issued and outstanding stock of Cauble and Company of Carolina ("Cauble"), a
regional mortgage banking firm for approximately $2.2 million, including cash
payments of approximately $1.8 million and a note payable of approximately
40
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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 allocated to intangibles and goodwill, which will be 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 has 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 beginning 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 will be 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 will be 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 will be earned as assets
within the funds are sold and is included, net of amortization, in goodwill
and other intangible assets, respectively, on the accompanying balance sheet.
Goodwill is being amortized on a straight line basis over 30 years. In the
third quarter of 1997 CB Richard Ellis 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 merger did not include several other entities which use the Koll name,
including, but not limited to, Koll Construction, Koll Real Estate Group (the
development and investment company) and Koll International (resorts and
recreational developments).
Effective July 1, 1996, CB Commercial Mortgage Company, Inc. ("CB
Mortgage"), a wholly-owned subsidiary of the Company, acquired all of the
outstanding capital stock of L.J. Melody & Company. The purchase consideration
for L.J. Melody was $15.0 million, including a $2.3 million contingent note to
the principal seller bearing 10.0% interest with principal payments starting
in 1998, $9.0 million in cash and $3.7 million in additional senior notes to
the sellers. The notes bore interest of 10.0% per annum, with maturities
through July 2001. The $2.3 million note has been accounted for as
compensation over the term of the note as the payment of this note was
contingent upon the principal seller's continued employment with the Company.
In October 1997 the Company paid the outstanding balance of the senior and
contingent notes related to the L.J. Melody acquisition of $1.1 million and
$3.0 million, respectively. Of this amount, $1.7 million was related to the
acceleration of a contingent note and is included in merger-related and other
nonrecurring charges in the accompanying statements of operations.
The L.J. Melody acquisition was accounted for as a purchase. The Company
allocated approximately $3.7 million of the total purchase price to
identifiable intangible assets, consisting of loan servicing and asset
management contracts, trade name, a covenant not to compete and other
intangibles. The remaining $9.0 million and a $1.5 million deferred tax
liability resulting from the acquisition were recorded to goodwill. The
intangibles are being amortized over their estimated useful lives or the lives
of the underlying contracts, as applicable, over periods ranging from three to
13 years. Goodwill is being amortized on a straight line basis over 30 years.
The assets and liabilities of certain acquired companies, along with the
related goodwill, intangibles and indebtedness, are reflected in the
accompanying consolidated financial statements as of December 31, 1998 and
41
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997. 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's material acquisitions for the
years ended December 31, 1998, 1997 and 1996, assuming the L.J. Melody and
Koll acquisitions had occurred on January 1, 1996 and the REI acquisition had
occurred on January 1, 1997 (amounts in thousands except per share data):
Year Ended December 31
------------------------------
1998 1997 1996
---------- -------- --------
(unaudited)
Revenue..................................... $1,051,114 $937,905 $701,301
Net income (loss)........................... 15,586 (2,433) 68,068
Net income (loss) applicable to common
stockholders............................... (16,687) (6,433) 67,068
Earnings (loss) per share
Basic..................................... (0.81) (0.32) 3.53
Diluted................................... (0.81) (0.32) 3.52
The proforma results do not necessarily represent results which would have
occurred if the acquisitions had taken place on the dates 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, Koll historical results for the first eight months of 1997 and REI
historical results for the first three months of 1998 include certain
nonrecurring adjustments.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
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
Goodwill at December 31, 1998 consisted of $425.5 million related to the
1995 through 1998 acquisitions which is being amortized over an estimated
useful life of 30 years and $19.6 million related to the Company's original
acquisition in 1989 which is being amortized over an estimated useful life of
40 years.
Other intangible assets at December 31, 1998 included approximately $7.9
million of deferred financing costs and $56.0 million of intangibles stemming
from the 1995 through 1998 acquisitions.
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. In
42
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the third quarter 1997, the Company wrote off the remaining Langdon Rieder
goodwill of $2.1 million, which has been recorded to amortization expense in
the accompanying statement of operations.
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.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Accumulated other comprehensive income consists of foreign currency
translation adjustments.
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
financial statements relate to deferred taxes.
New Accounting Pronouncements
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information during the quarter ended December 31, 1998.
SFAS 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 financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5, which is effective for financial statements for fiscal
years beginning after December 15, 1998, requires costs of start-up activities
and organization costs to be expensed as incurred. The adoption of this
statement is not expected to have a material impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board 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.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16,
43
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 and thereafter). SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997. 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. Based on derivative instruments
outstanding, SFAS No. 133 is not anticipated to have a significant impact on
earnings or other components of comprehensive income.
Reclassifications
Certain reclassifications, which do not have an effect on net income, have
been made to the 1997 and 1996 financial statements to conform to the 1998
presentation.
3. Property and Equipment
Property and equipment is stated at cost and consists of the following (in
thousands):
December 31,
------------------
1998 1997
-------- --------
Land..................................................... $ 1,822 $ 11,946
Buildings and improvements............................... 20,485 29,312
Furniture and equipment.................................. 106,363 46,066
Equipment under capital leases........................... 12,270 11,916
-------- --------
140,940 99,240
Accumulated depreciation and amortization................ (82,574) (48,931)
-------- --------
Property and equipment, net............................ $ 58,366 $ 50,309
======== ========
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 45 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.
In 1998, the Company wrote down the carrying value of the Company's
headquarters' building to its estimated fair market value and reclassified the
property to property held for sale included in other assets. The write-down of
$9.0 million was triggered by the Company's decision to sell its building and
relocate its headquarters.
44
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Investments in 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, 1998
and 1997 are as follows (in thousands):
December 31,
--------------
Interest 1998 1997
-------- ------- ------
KB Opportunity Investors............................ 45% $12,570 $ -
CB Commercial/Whittier Partners, LP................. 50 9,691 300
CBRE Pittsburgh..................................... 25 5,822 -
KB Investors IV..................................... 45 2,738 -
WPI/Koll Asia Pacific Advisors, L.L.C............... 50 247 1,178
Koll Amata.......................................... 46 71 390
Other............................................... * 494 6,090
------- ------
$31,633 $7,958
======= ======
- --------
*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:
December 31,
-----------------------
1998 1997 1996
------- ------- -------
Net revenue......................................... $72,911 $59,304 $14,195
Income from operations.............................. 27,921 20,398 2,313
Net income.......................................... 23,678 27,618 927
Condensed Balance Sheet Information:
December 31,
----------------
1998 1997
------- --------
Current assets............................................. $40,492 $ 47,684
Noncurrent assets.......................................... 45,686 936,527
Current liabilities........................................ 11,123 47,354
Noncurrent liabilities..................................... 20,274 1,169
Equity interest in earnings (losses) of the unconsolidated subsidiaries of
$3,443,000, $(113,000) and $145,000 for the years ended December 31, 1998,
1997 and 1996, respectively, have been included in "Operating, administrative
and other" on the Consolidated Statements of Operations.
5. Other Assets
Included in other assets at December 31, 1998 and 1997 are $2.7 million and
$2.1 million, respectively, of investments in limited partnerships managed for
a fee for institutional investors. The Company has a 1.0% general partnership
interest in each of the limited partnerships which is accounted for under the
equity method. Although the Company is the general partner of each limited
partnership, it does not have majority control over investment decisions in
any of the limited partnerships. Management fee income from the partnerships
was approximately $4.7 million, $6.1 million and $7.6 million for the years
ended December 31, 1998, 1997, and
45
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1996, respectively. In 1998, several investment properties within the limited
partnerships' were sold. The limited partnerships' total assets were
approximately $218.4 million and $448.9 million and total liabilities were
approximately $130.4 million and $202.4 million as of December 31, 1998, and
1997, respectively. The Company's share of net income (loss) for the years
ended December 31, 1998, 1997, and 1996 was not material.
The general partner capital contributions for certain partnerships are in
the form of unsecured notes payable totaling approximately $0.3 million and
$0.8 million at December 31, 1998, and 1997, respectively. (See Note 7)
Included in other assets at December 31, 1998 are $8.0 million of property
held for sale and $5.3 million of notes receivable from stock option
exercises. (See Note 3 and Note 9, respectively)
In addition, included in other assets at December 31, 1998 and 1997 was $7.4
million in inventoried property.
6. Employee Benefit Plans
Option Plans. A total of 1,000,000 shares of Common Stock have been reserved
for issuance under the CB Richard Ellis Services, Inc. 1990 Stock Option Plan.
Prior to the Company's November 1996 public offering, options for 1,000,000
shares, at an exercise price of $10.00 per share, were granted pursuant to the
plan. In 1996, at the time of the Company's public offering, options for
40,000 shares were granted at an exercise price of $20.00 per share. All
options vest over one to four year periods, expiring at various dates through
November 2006. During 1998, options to purchase 668,250 shares of Common Stock
were exercised. Options for 115,500 shares were outstanding as of December 31,
1998.
A total of 600,000 shares of Common Stock have been reserved for issuance
under the CB Richard Ellis Services, Inc. 1991 Service Providers Stock Option
Plan. In 1991 and 1998 below market options were granted to certain directors
as partial payment for director fees. During 1998, options for 152,500 shares
were granted to certain directors and executive officers at an exercise price
equal to fair market value at date of grant ranging from $33.44 to $38.50 per
share. On December 15, 1998 certain holders of a stock option grant 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 represented above market
value and simultaneously reduce the number of shares by 20%. All options vest
over one to five year periods, expiring at various dates through July 2008.
Options for 469,567 shares were outstanding as of December 31, 1998.
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 five
percent per quarter. Options for 90,750 shares of Common Stock were
outstanding as of December 31, 1998.
In August 1997, in conjunction with the Koll acquisition, the Company
approved the assumption of the options outstanding under the KMS (Koll)
Holding Company Amended 1994 Stock Option Plan (now known as the CBC
Substitute Option Plan ("CBCSP")), the Koll Acquisition Stock Option Plan
("KASOP") and the issuance of warrants. 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. As of
December 31, 1998, 158,072 options have been exercised. 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 exercise
prices ranging from $20.00 to $36.75 per share and vesting periods ranging
from immediate to three years, expiring in April 2007. Options for 480,000
shares were outstanding as of December 31, 1998.
46
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A total of 700,000 shares of Common Stock have been reserved for issuance
under the CB Richard Ellis Services, Inc. 1997 Employee Stock Option Plan
which was approved by shareholders. In 1997, an option for 40,000 shares, at
an exercise price of $23.75, was granted and vests quarterly, expiring in
March 2007. Also in 1997, options for 475,500 shares, at an exercise price of
$33.50 per share, were granted pursuant to the plan and vest over one to five
year periods, expiring in November 2007. During 1998, the Company granted
options for 107,500 shares of Common Stock at an exercise price ranging from
$33.44 to $36.19 per share. All options were granted at an exercise price
equal to fair market value at date of grant. On December 15, 1998 certain
holders of a stock option grant 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 represented above market value and simultaneously reduce the
number of shares by 20%. The vesting periods for these options range from
approximately one to five years, expiring at various dates through 2008.
Options for 509,800 shares were outstanding as of December 31, 1998.
In conjunction with the North Coast Mortgage Company acquisition, an option
for 25,000 shares was granted with an exercise price representing the fair
market value at date of grant of $32.50. On December 15, 1998 the option
holder elected to change the exercise price to $20.00 per share which
represented above market value and simultaneously reduce the number of shares
by 20%. The option vests over five years at a rate of 20% per year, expiring
in February 2008. Options for 20,000 shares were outstanding as of December
31, 1998.
In conjunction with the Shoptaw-James acquisition, an option for 25,000
shares was granted with an exercise price representing the fair market value
of $37.32 per share. The option vests over five years at a rate of 20% per
year, expiring in May 2008.
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 represented above market value 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 April 2008. Options for 377,486 shares
were outstanding as of December 31, 1998.
As allowed under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion ("APB") 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 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):
1998 1997 1996
------- ------- -------
Net Income:
As Reported....................................... $24,557 $24,397 $70,549
Pro Forma......................................... 20,396 21,940 69,932
Basic EPS:
As Reported....................................... (0.38) 1.34 5.05
Pro Forma......................................... (0.59) 1.18 5.00
Diluted EPS:
As Reported....................................... (0.38) 1.28 4.99
Pro Forma......................................... (0.59) 1.12 4.95
47
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1998, 1997 and 1996, respectively: risk-free
interest rates of 4.95%, 6.54% and 6.75% for the various plans. Expected
volatility for 1998, 1997 and 1996 is 48.16%, 36.67% 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.
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, 1998,
1997 and 1996 and changes during the years then ended is presented in the
table and narrative below:
1998 1997 1996
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Stock Options and Exercise Exercise Exercise
Warrants Shares Price Shares Price Shares Price
----------------- ---------- -------- --------- -------- --------- --------
Outstanding beginning of
the year............... 3,284,381 $22.43 1,116,890 $10.32 996,607 $ 9.65
Granted................. 1,885,944 25.94 2,392,554 26.99 180,750 13.87
Exercised............... (824,385) 10.73 (225,063) 10.78 (10,467) 9.57
Forfeited/Expired....... (1,408,855) 32.42 - - (50,000) 10.00
---------- ------ --------- ------ --------- ------
Outstanding end of
year................... 2,937,085 $23.18 3,284,381 $22.43 1,116,890 $10.32
---------- ------ --------- ------ --------- ------
Exercisable at end of
year................... 830,289 $21.94 1,412,800 $16.08 809,383 $ 9.55
Weighted average fair
value of options and
warrants granted....... $12.27 $14.27 $ 5.36
Significant option and warrant groups outstanding at December 31, 1998 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.... 187,817 4.32 yrs. $ 8.90 132,442 $ 8.43
$12.89-$18.04.... 269,015 6.29 yrs. 14.29 249,015 14.09
$20.00-$23.75.... 1,493,352 8.84 yrs. 20.54 183,032 21.17
$30.00-$37.31.... 986,901 6.82 yrs. 32.30 265,800 36.56
--------- ------ ------- ------
2,937,085 $23.18 830,289 $21.94
========= ====== ======= ======
48
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Purchase Plan. The Company has a restricted stock purchase plan
covering certain key employees including senior management. A total of 550,000
shares of Common Stock have been reserved for issuance under the 1996 Equity
Incentive Plan of CB Richard Ellis Services, Inc. The shares may be issued to
senior executives for a purchase price equal to the greater of $10.00 per
share or fair market value. During 1998, the Company sold 25,000 shares and
cancelled the issuance of 64,620 shares along with the related promissory
notes. The fair market value of shares sold in 1998 was $38.50. Under this
plan, 506,286 shares were outstanding as of December 31, 1998. 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
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
$33.7 million, $28.8 million and $19.0 million for the years ended December
31, 1998, 1997, and 1996, 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,
$2.9 million and $1.9 million for the years ended December 31, 1997, and 1996,
respectively. 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 accrues at a rate of interest
determined in accordance with the DCP and 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. For the twelve
months ended December 31, 1998, approximately $10.2 million and $5.4 million
were deferred in cash (including interest) and stock, respectively. The
accumulated deferrals as of December 31, 1998, were approximately $16.9
million in cash (including interest) and $10.0 million in stock for a total of
$26.9 million, all of which was charged to expense in the period of deferral.
Pension Plan. The Company, through the acquisition of Hillier Parker,
maintains a contributory defined benefit pension plan to provide retirement
benefits to former Hillier Parker employees participating in the plan. It is
the Company's policy to fund the minimum annual contributions required by
applicable regulations. Pension expense recognized totaled $909,000 in 1998.
Net periodic pension cost consisted of the following:
1998
--------------
(In thousands)
Employer service cost--benefits earned during the year........ $ 2,474
Interest cost on projected benefit obligation................. 2,061
Expected (return) loss on plan assets......................... (3,626)
-------
Net periodic pension cost..................................... $ 909
=======
49
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the plan's funded status and amounts
recognized in the accompanying balance sheet:
1998
--------------
(In thousands)
Actuarial Value of Benefit Obligations:
Vested benefit obligation..................................... $(66,865)
Non-vested benefit obligation................................. -
--------
Accumulated benefit obligation................................ $(66,865)
========
Projected benefit obligation.................................. $(73,190)
Plan assets at fair value..................................... 95,731
--------
Plan assets in excess of projected benefit obligation......... 22,541
Unrecognized net loss......................................... 5,700
--------
Prepaid pension asset included in balance sheet............... $ 28,241
========
Assumptions used in developing the projected benefit obligation as of
December 31 were as follows:
1998
----
Discount rate used in determining present values....................... 6.00%
Annual increase in future compensation levels.......................... 5.50%
Expected long-term rate of return on assets............................ 7.75%
Plan assets consist of a diversified portfolio of fixed-income investments
and equity securities.
50
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Long-term Debt
Long-term debt consists of the following (in thousands):
December 31,
-----------------
1998 1997
-------- --------
Senior Subordinated Notes, less unamortized discount of
$2.099 million, with fixed interest at 8.875%.......... $172,901 $ -
Revolving Credit Facility, with interest ranging from
6.69% to 8.25%......................................... 167,000 120,000
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 18,861
REI Acquisition Obligations, with interest ranging from
5.1% to 9.5%........................................... 7,575 -
Inventoried Property Loan, secured by inventoried
property, with interest at short-term commercial paper
borrowing rate plus 3.5% (8.3% and 9.1% at December 31,
1998 and 1997, respectively) due in 1999............... 7,093 7,470
REI Senior Notes with variable interest rates based on
Sterling LIBOR minus 1.50% due in 2002................. 5,439 -
Shoptaw-James Senior Notes, with fixed interest at 9.0%,
due from 1999 through 2001............................. 2,430 -
Carey, Brumbaugh Senior Notes, with fixed interest at
9.0%, due from 1999 through 2001....................... 2,160 -
Koll Acquisition Obligations, with interest ranging up
to 9.0%................................................ 1,469 3,843
Other................................................... 3,465 778
-------- --------
Total................................................. 386,034 150,952
Less current maturities............................... 12,343 4,679
-------- --------
Total long-term debt.................................. $373,691 $146,273
======== ========
Annual aggregate maturities of long-term debt as of December 31, 1998 are as
follows (in thousands): 1999--$12,343; 2000--$9,221; 2001--$1,966; 2002--
$5,468; 2003--$167,012 and $190,024 thereafter.
In May 1998, the Company amended its revolving credit facility with a bank
syndicate to provide a committed line of credit of 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. The
amount outstanding under this facility was $167.0 million as of December 31,
1998. Interest rate alternatives include Bank of America's reference rate plus
0.50% and LIBOR plus 1.50%. The weighted average rate on amounts outstanding
at December 31, 1998 was 6.89%.
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.
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.
51
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Commitments and Contingencies
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 $6.5 million in general and 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. Based on available reserves, 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.
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 have filed an appeal of the judgment. The Company believes that it has
adequate insurance coverage for the compensatory portion of the judgment and
adequate reserves for the punitive portion, as well as potential indemnity
claims from Prudential for the entire judgment.
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, 1998, are as follows (in thousands): 1999--$33,852; 2000--
$31,126; 2001--$26,977; 2002--$21,867; 2003--$17,106 and $47,221 thereafter.
Future minimum lease commitments for noncancelable capital leases at
December 31, 1998 are as follows (in thousands): 1999--$3,836; 2000--$1,604;
2001--$827 and 2002--$397. The interest portion of the lease payments totals
approximately $1.6 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 $32.4
million, $24.3 million and $18.1 million for the years ended December 31,
1998, 1997 and 1996, respectively.
52
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stockholders' Equity
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 CBCSP 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. As
of December 31, 1998, 599,967 warrants issued were outstanding.
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 $.25 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 1998, the Company issued 1,328,638 shares of Common Stock in the REI
Acquisition, 208,263 shares of Common Stock in the Hillier Parker 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.
In October 1998, the Company offered all employees under the 1990 Stock
Option Plan who hold options that expire 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 the 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 405,000 shares were issued under this offering. The related
promissory notes of $5.3 million are included in other assets.
On October 15, 1998 the Company announced that its board of directors had
approved a repurchase program under which it will begin purchasing up to $10.0
million of its common stock during the period of October 16, 1998 through
December 31, 1998. The Company purchased 488,900 shares of Common Stock for
approximately $8.9 million, cancelled 64,620 shares in connection with the
1996 Equity Incentive Plan and cancelled 34,734 shares under the Omnibus Stock
Incentive Plan.
53
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
10. Income Taxes
The provisions for income taxes for the years ended December 31, 1998, 1997
and 1996 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 provision (benefit) of
$829,000, $(175,000) and $(5,000) in 1998, 1997 and 1996, respectively.
The tax provision (benefit) for the years ended December 31, 1998, 1997 and
1996 excluding the tax impact on extraordinary items of $0.7 million,
consisted of the following (in thousands):
Year Ended December 31,
--------------------------
1998 1997 1996
------- ------- --------
Federal:
Current....................................... $ 4,265 $ 1,243 $ 730
Deferred tax.................................. 14,469 17,436 9,522
Reduction of valuation allowances............. - - (55,900)
------- ------- --------
18,734 18,679 (45,648)
State:
Current....................................... 3,470 2,193 658
Deferred tax.................................. (75) (314) 250
------- ------- --------
3,395 1,879 908
Foreign......................................... 3,797 - -
------- ------- --------
$25,926 $20,558 $(44,740)
======= ======= ========
The following is a reconciliation, stated as a percentage of pre-tax income,
of the U.S. statutory federal income tax rate to the Company's effective tax
rate on income from operations:
Year Ended
December 31,
----------------
1998 1997 1996
---- ---- ----
Federal statutory tax rate................................ 35% 35% 35%
Permanent differences, including goodwill, meals and
entertainment............................................ 8 7 5
State taxes, net of federal benefit....................... 4 2 4
Foreign income taxes...................................... 4 - -
Reduction of valuation allowances and other............... - 1 (217)
--- --- ----
Effective tax rate........................................ 51% 45% (173)%
=== === ====
54
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Beginning in 1992, the Company implemented SFAS No. 109, the modified
liability method of accounting for income taxes. Until the third quarter of
1996, the resulting net deferred tax asset had been fully reserved. Cumulative
tax effects of temporary differences are shown below as of December 31, 1998
and 1997 (in thousands):
Year Ended
December 31,
-----------------------
1998 1997
-------- --------
Asset (Liability)
Property and equipment............................. $ 4,325 $ 1,272
Reserves for bad debts, building write down, legal
expenses.......................................... 16,410 14,849
Intangible amortization............................ (14,998) (11,418)
Bonus, unexercised restricted stock, deferred
compensation...................................... 13,282 6,820
Partnership income................................. 4,877 4,778
Net operating loss and alternative minimum tax
credit carryforwards.............................. 28,049 49,003
Unconsolidated affiliates.......................... (141) (173)
All other, net..................................... 1,492 2,627
-------- --------
Net deferred tax asset before valuation
allowances........................................ 53,296 67,758
Valuation allowances............................... (26,667) (29,901)
-------- --------
Net deferred tax asset........................... $ 26,629 $ 37,857
======== ========
A deferred U.S. 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 intended to be permanently invested in
accordance with Accounting Principles Board ("APB") No. 23, Accounting for
Income Taxes--Special Areas, paragraph 12, aggregated $5.9 million at December
31, 1998.
During 1996, the Company projected, on a more likely than not basis, that a
portion of its NOL would be realizable in future periods and, accordingly,
reduced its existing deferred tax asset valuation allowances by $61.2 million
of which $5.3 million has been allocated to the purchase price of L.J. Melody
based on its estimated future potential to generate taxable income, and the
remaining $55.9 million has been recorded as a tax benefit (a reduction in
income tax provision). With the recognition of deferred tax assets, the future
period provisions for income tax will be recorded at the full effective tax
rate excluding the impact of other adjustments, if any, to valuation
allowances.
11. Per Share Information
Basic earnings (loss) per share was computed by dividing net income, 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.
55
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
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):
1998 1997 1996
--------------------------- -------------------------- --------------------------
Per- Per- Per-
Share Share Share
Income Shares Amount Income Share Amount Income Shares Amount
-------- ---------- ------ ------- ---------- ------ ------- ---------- ------
Bank earnings (loss) per
share
Net income before
extraordinary items... $ 24,557 $25,348 $70,549
Deemed dividend on
preferred stock
repurchase............ (32,273) - -
Preferred stock
dividends............. - (4,000) (1,000)
-------- ------- -------
Income before
extraordinary items
applicable to common
shareholders.......... (7,716) 20,136,117 $(0.38) 21,348 15,237,914 $ 1.40 69,549 13,783,882 $5.05
Extraordinary items,
net................... - - (951) (0.06) - -
-------- ------ ------- ------ ------- -----
Income (loss)
applicable to common
shareholders.......... $ (7,716) $(0.38) $20,397 $ 1.34 $69,549 $5.05
======== ====== ======= ====== ======= =====
Diluted earnings (loss)
per share
Income (loss) before
extraordinary items
applicable to common
shareholders.......... $ (7,716) 20,136,117 $21,348 15,237,914 $70,549 13,783,882
Diluted effect of
exercise of options
outstanding........... - - 759,015 61,443
Diluted effect of
convertible preferred
stock................. - - - 281,311
-------- ---------- ------- ---------- ------- ----------
Income (loss) before
extraordinary items
applicable to common
shareholders.......... (7,716) 20,136,117 $(0.38) 21,348 15,996,929 $ 1.34 70,549 14,126,636 $4.99
Extraordinary items,
net................... - - (951) (0.06) - -
-------- ------ ------- ------ ------- -----
Income (loss)
applicable to common
shareholders.......... $ (7,716) $(0.38) $20,397 $ 1.28 $70,549 $4.99
======== ====== ======= ====== ======= =====
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:
1998 1997 1996
--------------- ---------------- -----------------
Stock options
Outstanding............... 2,337,118 845,500 70,000
Price ranges.............. $0.30-$37.31 $31.00-$36.75 $20.00
Expiration ranges......... 4/18/99-7/22/08 4/21/07-11/17/07 11/24/06-11/25/06
Stock warrants
Outstanding............... 599,967 599,967 -
Price ranges.............. $30.00 $30.00 -
Expiration................ 8/28/04 8/28/04 -
Convertible preferred
shares
Number of common shares at
the applicable conversion
ratio.................... - 2,400,000 -
12. Fiduciary Funds
The consolidated balance sheets do not include the net assets of escrow,
agency and fiduciary funds, which amounted to $201.6 million and $186.8
million at December 31, 1998 and 1997, respectively.
56
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. 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 $1.7 million at
both December 31, 1998 and 1997, 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 7, is $177.2 million.
The fair value of the Inventoried Property Loan discussed in Note 7 is not
materially different from the carrying value of the debt.
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.
57
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Industry Segments
The Company provides integrated real estate services through four global
business units. The four units are Brokerage Services, Corporate Services,
Asset Services and Financial Services. The factors for determining the
reportable segments were based on the type of service and client. Each
business segment requires and is responsible for executing a unique marketing
and business strategy. Brokerage Services consists of commercial property
sales and leasing services. Corporate Services consists of outsourcing,
transaction management, advisory services and facilities management. Asset
Services consists of property management and related services. Financial
Services consists of investment property services (acquisitions and sales on
behalf of investors), mortgage loan origination and servicing through L.J.
Melody, investment management and advisory services through CB Richard Ellis
Investors L.L.C. ("CBRE Investors"), capital markets activities, valuation and
appraisal services and real estate market research. The following tables
summarize the revenue, cost and expenses, and operating income by operating
segment for the years ended December 31, 1998, 1997 and 1996.
Year Ended December 31,
------------------------------
1998 1997 1996
---------- -------- --------
(Dollars in thousands)
Revenue
Brokerage Services............................. $ 546,361 $423,485 $345,906
Corporate Services............................. 78,671 37,608 25,564
Asset Services................................. 126,322 67,442 44,783
Financial Services............................. 283,149 201,689 166,815
---------- -------- --------
$1,034,503 $730,224 $583,068
========== ======== ========
Operating income
Brokerage Services............................. $ 61,908 $ 43,927 $ 24,139
Corporate Services............................. 1,459 1,588 335
Asset Services................................. 9,231 4,547 5,149
Financial Services............................. 22,463 21,950 18,806
Merger-related and other nonrecurring costs.... (16,585) (12,924) -
---------- -------- --------
78,476 59,088 48,429
Interest income.................................. 3,054 2,598 1,503
Interest expense................................. 31,047 15,780 24,123
---------- -------- --------
Income before provision for income taxes......... $ 50,483 $ 45,906 $ 25,809
========== ======== ========
Depreciation and amortization
Brokerage Services............................. $ 10,820 $ 8,200 $ 7,092
Corporate Services............................. 2,491 898 243
Asset Services................................. 5,870 2,040 700
Financial Services............................. 13,004 6,922 5,539
---------- -------- --------
$ 32,185 $ 18,060 $ 13,574
========== ======== ========
Capital expenditures
Brokerage Services............................. $ 18,602 $ 6,678 $ 2,372
Corporate Services............................. 1,992 537 87
Asset Services................................. 4,854 1,492 209
Financial Services............................. 4,267 1,220 334
---------- -------- --------
$ 29,715 $ 9,927 $ 3,002
========== ======== ========
58
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December
31,
------------------
1998 1997 1996
------ ----- ----
(Dollars in
thousands)
Equity interest in earnings (losses) of unconsolidated
subsidiaries
Brokerage Services....................................... $ 316 $ 596 $145
Corporate Services....................................... - (298) -
Asset Services........................................... 2,422 (204) -
Financial Services....................................... 705 (207) -
------ ----- ----
$3,443 $(113) $145
====== ===== ====
As of December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in thousands)
Identifiable assets
Brokerage Services.................................... $ 162,907 $ 64,363
Corporate Services.................................... 113,123 72,189
Asset Services........................................ 241,838 131,285
Financial Services.................................... 276,603 122,757
Corporate............................................. 62,421 109,506
----------- -----------
$ 856,892 $ 500,100
=========== ===========
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.
As of December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in thousands)
Investment in and advances to unconsolidated
subsidiaries
Brokerage Services................................... $ 6,206 $ 972
Corporate Services................................... - 2,021
Asset Services....................................... 10,061 2,982
Financial Services................................... 15,366 1,983
----------- ----------
$31,633 $7,958
=========== ==========
59
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographic Information
Year Ended December,
------------------------------
1998 1997 1996
---------- --------- ---------
(Dollars in thousands)
Revenue
United States.................................. $ 884,304 $ 730,224 $ 583,068
All other countries............................ 150,199 -- --
---------- --------- ---------
$1,034,503 $ 730,224 $ 583,068
========== ========= =========
As of December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in thousands)
Long-Lived Assets
United States......................................... $ 56,973 $ 57,664
All other countries................................... 16,748 --
----------- -----------
$ 73,721 $ 57,664
=========== ===========
Long-lived assets are principally made up of property, plant and equipment,
property held for sale and inventoried property.
60
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Reserve for Allowance
Employee for Bad Legal Other
Loans Debts Reserve Reserves
----------- --------- ------- --------
Balance, December 31, 1995............. $1,535 $ 4,400 $ 3,455 $ -
Charges to expense................... 600 1,257 7,686 -
Write-offs, payments and other....... (425) (1,234) (1,820) -
------ ------- ------- -------
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
====== ======= ======= =======
61
EXHIBIT 12
CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED DIVIDENDS
FOR THE FIVE YEARS ENDED DECEMBER 31, 1998
(Dollars in thousands)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Pre-tax income (loss) from continuing
operations............................ $50,483 $45,906 $25,809 $ 8,250 $ 9,325
Fixed Charges........................ 41,854 22,884 30,629 29,172 23,283
------- ------- ------- ------- -------
Total earnings (loss) before fixed
charges............................... $92,337 $68,790 $56,438 $37,422 $32,608
======= ======= ======= ======= =======
Fixed Charges
Portion of rent expense
representative of the
interest factor(1).................. $10,807 $ 7,104 $ 6,506 $ 5,905 $ 5,921
Interest expense..................... 31,047 15,780 24,123 23,267 17,362
Preferred stock dividends(2)......... - 6,557 1,639 - -
------- ------- ------- ------- -------
Total fixed charges and preferred
dividends........................... $41,854 $29,441 $32,268 $29,172 $23,283
======= ======= ======= ======= =======
Ratio of earnings to fixed charges and
preferred dividends................... 2.21 2.34 1.75 1.28 1.40
======= ======= ======= ======= =======
- --------
(1) Represents one-third of operating lease costs which approximates the
portion that relates to the interest portion.
(2) Preferred stock dividend requirements have been reflected at their pre-tax
amounts. The 1998 amount does not reflect the deemed dividend associated
with the Company's repurchase of preferred stock of $32.3 million.
In computing the ratio of earnings to fixed charges; (a) earnings have been
based on income from continuing operations before income taxes, extraordinary
items and fixed charges (exclusive of interest capitalized) and (b) fixed
charges consist of interest and amortization of debt discount and expense
(including amounts capitalized) and the estimated interest portion of rents.
62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company expects to file with the Securities and Exchange Commission its
definitive proxy statement concerning its 1999 Annual Meeting of Stockholders
(the "1999 Annual Meeting Proxy Statement") no later than 120 days after
December 31, 1999. The information required by this item is set forth in the
1999 Annual Meeting Proxy Statement under the headings "Nomination and Election
of Directors---Directors and Nominees for Directors," "Nomination and Election
of Directors---Management" and "Nomination and Election of Directors---Section
16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the 1999 Annual Meeting
Proxy Statement under the headings "Nomination and Election of
Directors---Directors Fees" and "Nomination and Election of
Directors---Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the 1999 Annual Meeting
Proxy Statement under the heading "Nomination and Election of
Directors---Principal Stockholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the 1999 Annual Meeting
Proxy Statement under the heading "Nomination and Election of
Directors---Certain Relationships and Related Transactions" and 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 33.
2. Financial Statement Schedules
See Index to Consolidated Financial Statements set forth on page 33.
3. Exhibits
63
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
64
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
65
EXHIBIT INDEX--(Continued)
Exhibit
Number Description of Exhibit
------- ----------------------
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
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
66
EXHIBIT INDEX--(Continued)
Exhibit
Number Description of Exhibit
------- ----------------------
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
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 11 of the Consolidated Financial Statements)
12 Computation of Ratio of Earnings to Fixed Charges and Preferred
Dividends (filed as a Schedule Supporting the Consolidated
Financial Statements--see Index to Consolidated Financial
Statements)
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) Reports on Form 8-K
1. The registrant filed a Current Report on Form 8-K dated October 15,
1998 (i) discussing the recent decline of the Company's common stock price
and related investment community concerns and (ii) announcing that the
Company's Board of Directors approved a stock repurchase program under
which the Company will begin purchasing up to $10.0 million of its common
stock during the period beginning October 16, 1998 through December 31,
1998.
2. The registrant filed a Current Report on Form 8-K dated September 22,
1998 (i) announcing the completion of the Company's acquisition of the
73.0% of CB Commercial Real Estate Group Canada, Inc. which it did not
previously own and (ii) announcing completion of the Company's purchase of
the remaining ownership interests in the Richard Ellis Australia and New
Zealand businesses that it did not already own on October 2, 1998.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ James J. Didion
By: _________________________________
James J. Didion
Chairman of the Board and
Chief Executive Officer
Date: February 23, 1999
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/ James J. Didion Chief Executive Officer and February 23, 1999
____________________________________ Director
James J. Didion
/s/ John C. Haeckel Senior Executive Vice February 23, 1999
____________________________________ President, Chief Financial
John C. Haeckel Officer and Treasurer
/s/ Debra L. Morris Executive Vice President and February 23, 1999
____________________________________ Global Chief Accounting
Debra L. Morris Officer
(Principal Accounting
Officer)
/s/ Stanton D. Anderson Director February 23, 1999
____________________________________
Stanton D. Anderson
/s/ Gary J. Beban Director February 23, 1999
____________________________________
Gary J. Beban
/s/ Richard C. Blum Director February 23, 1999
____________________________________
Richard C. Blum
Director February , 1999
____________________________________
Bradford M. Freeman
/s/ Donald M. Koll Director February 23, 1999
____________________________________
Donald M. Koll
68
Signature Title Date
--------- ----- ----
/s/ Paul C. Leach Director February 23, 1999
____________________________________
Paul C. Leach
Director February , 1999
____________________________________
Frederic V. Malek
/s/ Peter V. Ueberroth Director February 23, 1999
____________________________________
Peter V. Ueberroth
/s/ Ray Elizabeth Uttenhove Director February 23, 1999
____________________________________
Ray Elizabeth Uttenhove
/s/ W. Brett White Director February 23, 1999
____________________________________
W. Brett White
Director February , 1999
____________________________________
Gary L. Wilson
/s/ Raymond E. Wirta Director February 23, 1999
____________________________________
Raymond E. Wirta
69
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
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
EXHIBIT INDEX--(Continued)
Exhibit
Number Description of Exhibit
------- ----------------------
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
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
EXHIBIT INDEX--(Continued)
Exhibit
Number Description of Exhibit
------- ----------------------
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
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 11 of the Consolidated Financial Statements)
12 Computation of Ratio of Earnings to Fixed Charges and Preferred
Dividends (filed as a Schedule Supporting the Consolidated
Financial Statements--see Index to Consolidated Financial
Statements)
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