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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
-----
Exchange Act of 1934
For the quarterly period ended June 30, 1997
_____ 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 0 - 18525
CB COMMERCIAL REAL ESTATE
SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 52-1616016
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
533 South Fremont Avenue
Los Angeles, California 90071-1798
(Address of principal executive offices) (Zip Code)
(213) 613 - 3123 Not Applicable
(Registrant's telephone (Former name, former address and formal
number, including area code) fiscal year if changed since last report)
</TABLE>
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___.
---
Number of shares of common stock outstanding at August 13, 1997 was 13,505,436.
1
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1997
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION PAGE
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Item 1. Consolidated Condensed Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited) and December 31, 1996......................... 3
Unaudited Consolidated Statements of Operations for the three months ended
June 30, 1997 and 1996 and for the six months ended June 30, 1997 and 1996................................ 4
Unaudited Consolidated Condensed Statements of Cash Flows for the three months
ended June 30, 1997 and 1996 and for the six months ended June 30, 1997 and 1996.......................... 5
Notes to Consolidated Condensed Financial Statements...................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 20
Signatures......................................................................................................... 21
</TABLE>
2
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 50,279 $ 49,328
Short term investments.................................................... 6,400 1,400
Receivables, less allowance of $4,494 and $4,423 for doubtful
accounts at June 30, 1997 and December 31, 1996, respectively............ 31,778 40,927
Deferred taxes............................................................ 11,536 16,257
Prepaid expenses and other................................................ 8,181 6,040
--------- ---------
Total current assets..................................................... 108,174 113,952
Property and equipment, net................................................ 40,424 40,835
Goodwill, net of accumulated amortization of $8,842 and $7,563 as of
June 30, 1997 and December 31, 1996, respectively......................... 64,036 65,362
Other intangible assets, net of accumulated amortization of $256,132 and
$254,516 as of June 30, 1997 and December 31, 1996, respectively.......... 9,229 10,521
Inventoried property....................................................... 7,355 7,355
Deferred taxes............................................................. 35,091 35,146
Other assets, net.......................................................... 5,250 5,773
--------- ---------
Total assets............................................................. $ 269,559 $ 278,944
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Compensation and employee benefits........................................ $ 26,100 $ 38,747
Accounts payable and accrued expenses..................................... 23,164 28,020
Senior revolving credit lines............................................. 16,000 -
Reserve for bonus and profit sharing...................................... 8,939 21,414
Current maturities of long-term debt...................................... 15,031 15,314
Current portion of capital lease obligations.............................. 1,849 2,510
--------- ---------
Total current liabilities................................................ 91,083 106,005
--------- ---------
Long-term debt, less current maturities:
Senior term loans......................................................... 59,528 65,528
Senior subordinated term loans............................................ 71,872 72,872
Inventoried property loan................................................. 7,470 7,470
Other long-term debt...................................................... 2,620 2,659
--------- ---------
Total long-term debt..................................................... 141,490 148,529
--------- ---------
Other long-term liabilities................................................ 29,441 25,925
--------- ---------
Total liabilities........................................................ 262,014 280,459
--------- ---------
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value........................................... 40 40
Common stock, $.01 par value.............................................. 134 133
Additional paid-in capital................................................ 200,768 198,026
Notes receivable from sale of stock....................................... (5,931) (5,109)
Accumulated deficit....................................................... (187,466) (194,605)
--------- ---------
Total stockholders' equity (deficit)..................................... 7,545 (1,515)
--------- ---------
Total liabilities and stockholders' equity (deficit)..................... $ 269,559 $ 278,944
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue................................................. $ 157,958 $ 130,954 $ 292,022 $ 243,695
Costs and Expenses:
Commissions, fees and other incentives............... 82,521 66,262 150,128 121,269
Operating, administrative and other.................. 60,206 53,594 116,596 103,154
Depreciation and amortization........................ 3,053 3,038 6,174 6,318
----------- ----------- ----------- -----------
Operating income........................................ 12,178 8,060 19,124 12,954
Interest income......................................... 587 354 1,219 749
Interest expense........................................ 4,104 5,759 7,849 11,687
----------- ----------- ----------- -----------
Income before provision for income tax.................. 8,661 2,655 12,494 2,016
Provision for income tax................................ 3,795 438 5,355 390
----------- ----------- ----------- -----------
Net income.............................................. $ 4,866 $ 2,217 $ 7,139 $ 1,626
=========== =========== =========== ===========
Net income applicable to common stockholders............ $ 3,866 $ 2,217 $ 5,139 $ 1,626
=========== =========== =========== ===========
Primary earnings per share.............................. $0.28 $0.16 $0.37 $0.12
=========== =========== =========== ===========
Weighted average shares outstanding for primary
earnings per share..................................... 14,010,527 13,806,956 13,952,451 13,695,429
=========== =========== =========== ===========
Fully diluted earnings per share........................ $0.27 $0.16 $0.37 $0.12
=========== =========== =========== ===========
Weighted average shares outstanding for fully diluted
earnings per share..................................... 14,106,436 13,806,956 14,063,543 13,695,429
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1997 1996 1997 1996
-------- --------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income................................................ $ 4,866 $ 2,217 $ 7,139 $ 1,626
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................ 3,053 3,038 6,174 6,318
Deferred interest........................................ - 2,111 - 4,267
Deferred compensation.................................... 669 210 2,828 1,059
Deferred taxes........................................... 3,384 - 4,776 -
Changes in reserve for bonus and profit sharing........... 7,523 4,506 (14,439) (7,568)
Net change in other operating assets and liabilities...... (277) 1,783 (3,026) (3,682)
------- ------- ------- -------
Net cash provided by operating activities............. 19,218 13,865 3,452 2,020
------- ------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (849) (937) (2,950) (1,511)
Increase in intangible assets and goodwill................ (25) - (3,054) (1,321)
Proceeds from collections on notes receivable............. 5 2,705 11 2,716
Increase in short term investments........................ - - (5,000) -
Other investing activities, net........................... 66 - 347 -
------- ------- ------- -------
Net cash provided by (used in) investing activities... (803) 1,768 (10,646) (116)
------- ------- ------- -------
Cash flows from financing activities:
Proceeds from senior revolving credit line................ - 6,323 16,000 18,323
Repayment of senior revolving credit line................. - (2,000) - (2,000)
Repayment of senior term loans............................ (3,000) (7,898) (6,283) (12,358)
Repayment of capital leases............................... (695) (712) (1,460) (1,424)
Repayment of senior subordinated term loans............... (500) - (1,000) -
Other financing activities, net........................... 683 (19) 888 (39)
------- ------- ------- -------
Net cash provided by (used in) financing activities... (3,512) (4,306) 8,145 2,502
------- ------- ------- -------
Net increase in cash and cash equivalents.................. 14,903 11,327 951 4,406
Cash and cash equivalents, at beginning of period.......... 35,376 16,124 49,328 23,045
------- ------- ------- -------
Cash and cash equivalents, at end of period................ $50,279 $27,451 $50,279 $27,451
======= ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (none capitalized).............................. $ 4,370 $ 3,214 $ 6,468 $ 6,666
Federal and state income taxes........................... 794 142 953 320
Non-cash investing and financing activities:
Equipment acquired under capital lease.................... 411 454 411 907
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS
ORGANIZATION. CB Commercial Real Estate Services Group, Inc. (formerly CB
Commercial Holdings, Inc.) ("CB Commercial") was organized to acquire Coldwell
Banker Commercial Group, Inc. and had no operations prior to the acquisition on
April 19, 1989 (the "Acquisition"). In 1991 Coldwell Banker Commercial Group,
Inc. was renamed CB Commercial Real Estate Group, Inc. On November 25, 1996, CB
Commercial 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 approximately $80.0 million were used to repay a
portion of the Company's senior secured indebtedness and senior subordinated
indebtedness. CB Commercial is a holding company that conducts its operations
solely through CB Commercial Real Estate Group, Inc. and its subsidiaries
(collectively the "Company").
NATURE OF OPERATIONS. The Company provides a full range of services to
commercial real estate tenants, owners, and investors including: (i) brokerage
(facilitating sales and leases), investment properties (acquisitions and sales
on behalf of investors), corporate services, property management, and real
estate market research (collectively, "Property and User Services"), and (ii)
mortgage banking (mortgage loan origination and servicing), investment
management and advisory services and valuation and appraisal services
(collectively, "Investor 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 transactional in nature and
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. The results
of operations for the six months ended June 30, 1997 are not necessarily
indicative of results to be expected for the entire year ending December 31,
1997 or for any future period.
ACQUISITIONS. Refer to the Company's financial statements included in the
Annual Report on Form 10-K for the year ended December 31, 1996 for a discussion
of the Company's acquisitions.
The assets and liabilities of the acquired companies, along with the related
goodwill, intangibles and indebtedness, are reflected in the accompanying
consolidated financial statements as of June 30, 1997. The results of
operations of the acquired companies are included in the consolidated results
from the dates they were acquired. The pro forma results of operations of the
Company for the three months ended June 30, 1996 and six months ended June 30,
1996, assuming the L.J. Melody acquisition had occurred on January 1, 1996,
would have been as follows (amounts in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
------------------ ----------------
<S> <C> <C>
Revenue.................................. $133,607 $247,112
Net income............................... $ 1,048 $ 421
Net income per common and
common equivalent share outstanding... $ 0.08 $ 0.03
</TABLE>
The Company has signed a definitive agreement to purchase Koll Real Estate
Services ("Koll") through a merger subject to approval of shareholders at the
annual meeting to be held on August 28, 1997.
6
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND ACQUISITIONS (CONTINUED)
Under the terms of the agreement, CB Commercial, based in Los Angeles, will
exchange approximately 5.6 million shares of its common stock and stock options
(as well as warrants to purchase an additional 600,000 shares at $30.00 per
share) for all of the outstanding stock and stock options of Koll. The
transaction, a tax-free reorganization to be accounted for as a purchase,
includes the issuance of equity valued at approximately $133.4 million and the
assumption of debt of approximately $50.4 million as of June 30, 1997, and is
expected to be accretive to fourth quarter 1997 earnings of CB Commercial. In
the third quarter of 1997 CB Commercial expects to record the effects of a
reserve for integration and related charges which, together with adjustments in
the purchase price related to integration on the Koll side, could be as high as
$18.0 million to $20.0 million.
The merger does not include several other entities which use the Koll name,
including Koll Construction, Koll Real Estate Group (the development and
investment company) and Koll International (resorts and recreational
developments).
The transaction, which has been approved by the Boards of Directors of both
companies, still is subject to approval by shareholders of Koll and CB
Commercial. Pending shareholder approval, the companies seek to complete the
merger by late August 1997.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at June 30, 1997 consisted of $43.4 million related to the 1995 and
1996 acquisitions which is being amortized over an estimated useful life of 30
years and $20.6 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 June 30, 1997 included approximately $2.7 million
of deferred financing costs and $6.5 million of intangibles stemming from the
L.J. Melody, Westmark and Langdon Rieder 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 change in a material way 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.
3. DEFERRED COMPENSATION PLAN
Under the Company's Deferred Compensation Plan (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 six months ended June 30, 1997, approximately $2.2 million and $767,000
were deferred in cash (including interest) and stock, respectively. The
accumulated deferrals as of June 30, 1997 were approximately $4.2 million in
cash (including interest) and $3.7 million in stock for a total of $7.9 million,
all of which was charged to expense in the period of deferral.
7
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The provision for income taxes for the six month periods ended June 30, 1997
and 1996 was computed in accordance with Interpretation No. 18 of APB opinion
No. 28 on reporting taxes for interim periods and was based on projections of
total year pretax income without taking into account anticipated reorganizations
which have not yet transpired, including the Koll merger. Reference is made to
Note 9 to the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 for a discussion of the
Company's deferred taxes including net operating loss carryforwards.
5. COMMITMENTS AND CONTINGENCIES
The Company is a party to a number of pending or threatened lawsuits arising
out of, or incident to, its ordinary course of business. In August 1993, a
former commissioned salesperson of the Company filed a lawsuit against the
Company in the Superior Court of New Jersey, Bergin 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. The Company hired new counsel and in
January 1997 filed motions for a new trial, reversal of the verdict and
reduction of damages. On March 27, 1997 the trial court denied the Company's
motions and awarded the plaintiff $638,000 in attorneys' fees and costs. The
Company has been advised by appellate counsel that it has a meritorious basis to
pursue an appeal of the verdict, which the Company will do. This accrual was
initially established at $250,000 in 1994 and increased to $800,000 in 1995 and
represented the Company's estimate of its loss exposure for this matter based on
its assessment and analysis as of those dates. In 1996, further adjustments
were made to the reserve to reflect the Company's estimate of ultimate loss, if
any. The Company believes its reserves for this case at June 30, 1997 are
adequate. 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.
6. STOCKHOLDERS' EQUITY
In February 1997 the Company issued 82,740 shares of its Common Stock with a
fair value at date of issuance of approximately $1,872,000 to the Company's
Capital Accumulation Plan for the year ended December 31, 1996.
In June 1997, under the 1996 Equity Incentive Plan, a key employee purchased
35,000 shares of Common Stock at fair market value by delivery of a full
recourse promissory note. The related promissory note is also included in
stockholders' equity.
As of June 30, 1997, 13,472,936 shares of Common Stock were outstanding.
7. PER SHARE INFORMATION
Primary earnings per share is calculated based on weighted average common
shares and common stock equivalents, which include dilutive stock options
outstanding and, for the three and six months ended June 30, 1996, preferred
stock. This calculation also includes all issuances of stock and stock options
made within twelve months prior to the Offering as promotional shares for all
periods prior to the Offering. Fully diluted earnings per share further assumes
the conversion of preferred stock, if dilutive, for the period after the
Offering when the preferred stock was no longer considered to be a common stock
equivalent.
8
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
7. PER SHARE INFORMATION (CONTINUED)
The Company recapitalized its various classes of stock in conjunction with
the Offering. Weighted average common and common equivalent shares outstanding
are comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Preferred stock:
Series A-1..................... - 1,000,000 - 1,000,000
Series A-2..................... - 2,000,000 - 2,000,000
Series A-3..................... - 1,000,000 - 1,000,000
Common stock:
Common Stock (post-Offering)... 13,410,119 - 13,354,100 -
Class B-1 (pre-Offering)....... - 1,854,106 - 1,854,106
Class B-2 (pre-Offering)....... - 6,066,675 - 5,955,148
Class C-1 (pre-Offering)....... - 800,000 - 800,000
Class C-R (pre-Offering)....... - 800,000 - 800,000
Promotional shares.................. - 245,462 - 245,462
Stock options....................... 600,408 40,713 598,351 40,713
---------- ---------- ---------- ----------
14,010,527 13,806,956 13,952,451 13,695,429
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE:
Preferred stock:
Series A-1..................... - 1,000,000 - 1,000,000
Series A-2..................... - 2,000,000 - 2,000,000
Series A-3..................... - 1,000,000 - 1,000,000
Common stock:
Common Stock (post-Offering)... 13,410,119 - 13,354,100 -
Class B-1 (pre-Offering)....... - 1,854,106 - 1,854,106
Class B-2 (pre-Offering)....... - 6,066,675 - 5,955,148
Class C-1 (pre-Offering)....... - 800,000 - 800,000
Class C-R (pre-Offering)....... - 800,000 - 800,000
Promotional shares.................. - 245,462 - 245,462
Stock options....................... 696,317 40,713 709,443 40,713
---------- ---------- ---------- ----------
14,106,436 13,806,956 14,063,543 13,695,429
========== ========== ========== ==========
</TABLE>
Actual shares of common stock outstanding at June 30, 1997 were 13,472,936.
8. RECLASSIFICATION
Certain reclassifications, which do not have any effect on net income, have
been made to the June 1996 financial statements to conform to the June 1997
presentation.
9
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION -
CB Commercial Real Estate Services Group, Inc. (formerly CB Commercial
Holdings, Inc.) ("CB Commercial") was organized to acquire Coldwell Banker
Commercial Group, Inc. and had no operations prior to the acquisition on April
19, 1989 (the "Acquisition"). In 1991 Coldwell Banker Commercial Group, Inc.
was renamed CB Commercial Real Estate Group, Inc. On November 25, 1996, CB
Commercial 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 approximately $80.0 million were used to repay a
portion of the Company's senior secured indebtedness and senior subordinated
indebtedness. CB Commercial is a holding company that conducts its operations
solely through CB Commercial Real Estate Group, Inc. and its subsidiaries
(collectively the "Company").
The Company provides integrated real estate services which include (i)
Property and User Services, consisting of brokerage (facilitating sales and
leases), investment properties (acquisitions and sales on behalf of investors),
corporate services, property management, and real estate market research, and
(ii) Investor Services, consisting of mortgage banking (mortgage loan
origination and servicing) through L.J. Melody & Company ("L.J. Melody"),
investment management and advisory services through Westmark Realty Advisors
L.L.C. ("Westmark"), and valuation and appraisal services.
A significant portion of the Company's revenue is transactional in nature and
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. The results
of operations for the six months ended June 30, 1997 are not necessarily
indicative of results to be expected for the entire year ending December 31,
1997 or for any future period.
Revenue from Property and User 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 client base tend to minimize the
impact of economic cycles on annual revenue. Approximately 55% of the costs and
expenses associated with Property and User Services are directly correlated to
revenue while approximately 27% of the costs and expenses of Investor Services
are directly correlated to revenue.
The Company has completed three strategic acquisitions since the beginning of
1995 and 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, 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 to the extent possible). 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).
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 level of occupancy and rental levels, and, as a
result, property values. 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.
10
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CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES (CONTINUED)
The $0.25 per share quarterly dividend on the Company's Preferred Stock,
which accrues from October 1, 1996, will result, if and when paid, in a cost of
$1.0 million per quarter. Until the Company has completed its acquisition
program it does not intend to pay dividends on the Preferred Stock. As a
consequence, such dividends will accumulate and bear interest, which will be
paid on a current basis.
The Company's revenues are impacted by numerous factors, including the
perception of trends in the general economy, interest rate levels and
anticipated and actual changes in the federal tax law.
The Company's earnings before interest, income taxes, depreciation and
amortization ("EBITDA") was $25.3 million and $19.3 million for the six months
ended June 30, 1997 and 1996, respectively.
EBITDA effectively removes the impact of certain non-cash charges on income
such as depreciation and amortization of intangible assets relating to
acquisitions and Federal income taxes to the extent they are offset by NOLs.
Management believes that the presentation of EBITDA will enhance a reader's
understanding of the Company's operating performance and ability to service debt
as it provides a measure of cash generated 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.
RESULTS OF OPERATIONS -
The following unaudited table sets forth items derived from the Company's
Consolidated Statements of Operations for each of the periods presented in
dollars and as a percentage of revenue.
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
------------------------------------- -------------------------------------
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......................... $157,958 100.0% $130,954 100.0% $292,022 100.0% $243,695 100.0%
Costs and expenses:
Commissions, fees and other
incentives.................... 82,521 52.2 66,262 50.6 150,128 51.4 121,269 49.8
Operating, administrative
and other..................... 60,206 38.1 53,594 40.9 116,596 39.9 103,154 42.3
Depreciation and amortization... 3,053 1.9 3,038 2.3 6,174 2.1 6,318 2.6
-------- ----- -------- ----- -------- ----- -------- -----
Operating income................. 12,178 7.8 8,060 6.2 19,124 6.6 12,954 5.3
Interest income.................. 587 0.3 354 0.3 1,219 0.4 749 0.3
Interest expense................. 4,104 2.6 5,759 4.4 7,849 2.7 11,687 4.8
-------- ----- -------- ----- -------- ----- -------- -----
Income before provision for
income tax....................... 8,661 5.5 2,655 2.1 12,494 4.3 2,016 0.8
Provision for income tax......... 3,795 2.4 438 0.3 5,355 1.8 390 0.1
-------- ----- -------- ----- -------- ----- -------- -----
Net income....................... $ 4,866 3.1 $ 2,217 1.8 $ 7,139 2.5 $ 1,626 0.7
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
11
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES (CONTINUED)
The following unaudited tables summarize the revenue, cost and expenses, and
operating income by operating segment for the quarter ended June 30, 1997 and
1996 and the six months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------------------------- -----------------------------------------
1997 1996 1997 1996
----------------- ----------------- ----------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTY AND USER SERVICES
Revenue:
Brokerage................. $ 92,028 66.2% $ 79,868 69.6% $172,168 67.1% $144,988 68.4%
Investment Properties..... 34,626 24.9 24,639 21.5 61,324 23.9 47,301 22.3
Corporate Services........ 6,882 5.0 5,114 4.4 12,778 5.0 9,404 4.4
Property Management....... 4,976 3.6 4,920 4.3 9,648 3.7 9,665 4.6
Real Estate Market
Research................. 486 0.3 235 0.2 829 0.3 680 0.3
-------- ----- -------- ----- -------- ----- -------- -----
138,998 100.0 114,776 100.0 256,747 100.0 212,038 100.0
Costs and expenses:
Commissions, fees and
other incentives........ 76,797 55.3 62,587 54.5 140,517 54.7 114,438 54.0
Operating, administrative
and other............... 50,340 36.2 44,362 38.7 96,731 37.7 84,431 39.8
Depreciation and
amortization............. 1,975 1.4 2,336 2.0 4,018 1.6 4,741 2.2
-------- ----- -------- ----- -------- ----- -------- -----
Operating income............ $ 9,886 7.1% $ 5,491 4.8% $ 15,481 6.0% $ 8,428 4.0%
======== ===== ======== ===== ======== ===== ======== =====
INVESTOR SERVICES
Mortgage Banking
Revenue..................... $ 6,674 100.0% $ 3,730 100.0% $ 11,357 100.0% $ 7,245 100.0%
Costs and expenses:
Commissions, fees and
other incentives........ 3,416 51.2 1,504 40.3 5,184 45.6 2,839 39.2
Operating, administrative
and other............... 2,830 42.4 1,576 42.2 5,580 49.1 3,218 44.4
Depreciation and
amortization............. 350 5.2 66 1.8 699 6.2 132 1.8
-------- ----- -------- ----- -------- ----- -------- -----
Operating income (loss)..... $ 78 1.2% $ 584 15.7% $ (106) (0.9)% $ 1,056 14.6%
======== ===== ======== ===== ======== ===== ======== =====
Investment Management and
Advisory
Revenue..................... $ 7,046 100.0% $ 7,845 100.0% $ 14,378 100.0% $ 16,001 100.0%
Costs and expenses:
Operating, administrative
and other............... 5,609 79.6 5,669 72.2 10,871 75.6 11,632 72.7
Depreciation and
amortization............. 695 9.9 602 7.7 1,389 9.7 1,375 8.6
-------- ----- -------- ----- -------- ----- -------- -----
Operating income............ $ 742 10.5% $ 1,574 20.1% $ 2,118 14.7% $ 2,994 18.7%
======== ===== ======== ===== ======== ===== ======== =====
Valuation and Appraisal
Services
Revenue..................... $ 5,240 100.0% $ 4,603 100.0% $ 9,540 100.0% $ 8,411 100.0%
Costs and expenses:
Commissions, fees and
other incentives........ 2,308 44.1 2,171 47.2 4,427 46.4 3,992 47.5
Operating, administrative
and other............... 1,427 27.2 1,987 43.2 3,414 35.8 3,873 46.0
Depreciation and
amortization............. 33 0.6 34 0.7 68 0.7 70 0.8
-------- ----- -------- ----- -------- ----- -------- -----
Operating income............ $ 1,472 28.1% $ 411 8.9% $ 1,631 17.1% $ 476 5.7%
======== ===== ======== ===== ======== ===== ======== =====
TOTAL INVESTOR SERVICES
Revenue..................... $ 18,960 100.0% $ 16,178 100.0% $ 35,275 100.0% $ 31,657 100.0%
Costs and expenses:
Commissions, fees and
other incentives........ 5,724 30.2 3,675 22.7 9,611 27.3 6,831 21.6
Operating, administrative
and other............... 9,866 52.0 9,232 57.1 19,865 56.3 18,723 59.1
Depreciation and
amortization............. 1,078 5.7 702 4.3 2,156 6.1 1,577 5.0
-------- ----- -------- ----- -------- ----- -------- -----
Operating income............ $ 2,292 12.1% $ 2,569 15.9% $ 3,643 10.3% $ 4,526 14.3%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
12
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES (CONTINUED)
QUARTER ENDED JUNE 30, 1997, COMPARED TO THE QUARTER ENDED JUNE 30, 1996
REVENUE on a consolidated basis for the quarter ended June 30, 1997 was
$158.0 million, an increase of $27.0 million or 20.6% from $131.0 million for
the quarter ended June 30, 1996. The overall increase in revenue, compared to
the same period in 1996, reflected a continued improvement in the commercial
real estate markets across the country. This improvement reflected increasing
investor confidence in the national economy and, in particular, real estate
assets as well as increasing asset values. The result has been heightened real
estate market liquidity.
Property and User Services revenue was $139.0 million for the quarter ended
June 30, 1997, an increase of $24.2 million or 21.1% from $114.8 million for the
quarter ended June 30, 1996. Brokerage revenue accounted for $92.0 million, an
increase of $12.1 million or 15.2% from $79.9 million, investment properties
revenue accounted for $34.6 million, an increase of $10.0 million or 40.5% from
$24.6 million and corporate services revenue was $6.9 million, an increase of
$1.8 million or 34.6% from $5.1 million. These increases resulted in part from
an increase in the total number and size of brokerage and investment properties
sale and lease transactions closed during the quarter ended June 30, 1997
compared to transactions closed during the quarter ended June 30, 1996.
Property management revenue was $5.0 million for the quarter ended June 30,
1997, an increase of $0.1 million or 1.1% from $4.9 million for the quarter
ended June 30, 1996.
Investor Services revenue was $19.0 million for the quarter ended June 30,
1997, an increase of $2.8 million or 17.2% from $16.2 million for the quarter
ended June 30, 1996. Mortgage banking revenue was $6.7 million, an increase of
$3.0 million or 78.9% from $3.7 million primarily as a result of the L.J. Melody
acquisition. Valuation and appraisal services revenue accounted for $5.2
million, an increase of $0.6 million or 13.8% from $4.6 million. Investment
management and advisory revenue was $7.1 million, a decrease of $0.7 million, or
10.2% from $7.8 million, primarily a result of a decrease in fund management
fees due to fund liquidations, offset in part by an increase in disposition
fees.
COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis for the
quarter ended June 30, 1997 were $82.5 million, an increase of $16.2 million or
24.4% from $66.3 million for the quarter ended June 30, 1996. The increase in
these costs is largely correlated 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 for the quarter increased from
50.6% in 1996 to 52.2% in 1997. The increase in commissions, fees and other
incentives as a percentage of revenue is primarily due to the revenue reduction
in investment management and advisory, which does not incur this type of
revenue-based expense. Excluding investment management and advisory,
commissions, fees and other incentives as a percent of revenues increased from
53.8% for 1996 to 54.8% for 1997 primarily as a result of higher commission
eligibility levels resulting from the revenue increase.
Property and User Services commissions, fees and other incentives were $76.8
million for the quarter ended June 30, 1997, an increase of $14.2 million or
22.7% from $62.6 million for the quarter ended June 30, 1996, and an increase as
a percentage of revenue from 54.5% in 1996 to 55.3% in 1997. The increase is
primarily a result of higher commission eligibility levels resulting from the
revenue increase.
Investor Services commissions, fees and other incentives were $5.7 million
for the quarter ended June 30, 1997, an increase of $2.0 million or 55.8% from
$3.7 million for the quarter ended June 30, 1996. The increase is primarily a
result of an increase in mortgage banking commission eligibility resulting from
the revenue increase and base salary costs related to newly hired producers. As
newly hired producers start generating loan fees, commission expense as a
percentage of revenue should decline.
OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis for the quarter
ended June 30, 1997 was $60.2 million, an increase of $6.6 million or 12.3% from
$53.6 million for the quarter ended June 30, 1996, and decreased as a percentage
of revenue for such periods from 40.9% to 38.1%. The increase in the amount is
consistent with the increased operating activities.
13
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES (CONTINUED)
QUARTER ENDED JUNE 30, 1997, COMPARED TO THE QUARTER ENDED JUNE 30, 1996
(CONTINUED)
Property and User Services operating, administrative and other was $50.3
million for the quarter ended June 30, 1997, an increase of $5.9 million or
13.5% from $44.4 million for the quarter ended June 30, 1996, but decreased as a
percentage of revenue from 38.7% to 36.2%. The increase in the amount is a
result of additional personnel requirements and business promotional expenses
which contributed to the increase in revenue as well as increased incentive
compensation award eligibility based on increased operating results.
Investor Services operating, administrative and other was $9.9 million for
the quarter ended June 30, 1997, an increase of $0.7 million or 6.9% from $9.2
million for the quarter ended June 30, 1996, but decreased as a percentage of
revenue from 57.1% to 52.0%. The increase in the amount is primarily a result
of the L.J. Melody acquisition, offset in part by a decrease in severance
payments resulting from the Westmark acquisition.
DEPRECIATION AND AMORTIZATION on a consolidated basis for the quarter ended
June 30, 1997 was $3.1 million, an increase of $0.1 million or 3.3% from $3.0
million for the quarter ended June 30, 1996.
Property and User Services depreciation and amortization was $2.0 million for
the quarter ended June 30, 1997, a decrease of $0.3 million or 15.5% from $2.3
million for the quarter ended June 30, 1996 primarily as a result of an increase
in fully depreciated assets.
Investor Services depreciation and amortization was $1.1 million for the
quarter ended June 30, 1997, an increase of $0.4 million or 53.6% from $0.7
million for the quarter ended June 30, 1996 as a result of an increase in
goodwill and intangible amortization related to the L.J. Melody acquisition.
OPERATING INCOME on a consolidated basis for the quarter ended June 30, 1997
was $12.2 million, an increase of $4.1 million or 51.1% from $8.1 million for
the quarter ended June 30, 1996. The increase in operating income resulted from
an increase in revenue of $27.0 million or 20.6% partially offset by a related
increase in commission expense of $16.2 million or 24.4%, and a $6.6 million or
12.3% increase in operating expenses as described above.
Property and User Services operating income was $9.9 million for the quarter
ended June 30, 1997, an increase of $4.4 million or 80.0% from $5.5 million for
the quarter ended June 30, 1996. The increase in Property and User Services
operating income resulted from an increase in Property and User Services revenue
of $24.2 million or 21.1% partially offset by a related increase in commission
expense of $14.2 million or 22.7%, and a $5.9 million or 13.5% increase in
operating expenses as described above.
Investor Services operating income was $2.3 million for the quarter ended
June 30, 1997, a decrease of $0.3 million or 10.8% from $2.6 million for the
quarter ended June 30, 1996. The decrease in Investor Services operating income
resulted from an increase in commission expense of $2.0 million or 55.8% and a
$0.7 million or 6.9% increase in operating expenses as described above,
partially offset by improved Investor Services revenue of $2.8 million or 17.2%.
INTEREST EXPENSE on a consolidated basis for the quarter ended June 30, 1997
was $4.1 million, a decrease of $1.7 million or 28.7% from $5.8 million for the
quarter ended June 30, 1996. The decrease is a result of paydowns on senior
debt primarily resulting from the IPO and paydowns of Westmark acquisition debt,
offset in part by an increase in debt related to the L.J. Melody acquisition.
NET PROVISION FOR INCOME TAX on a consolidated basis for the quarter ended
June 30, 1997 was $3.8 million, compared to $438,000 for the quarter ended June
30, 1996. The 1997 provision is related to higher pretax income and the use of
the full effective tax rate in 1997 resulting from the recognition of a portion
of the Company's deferred tax assets in 1996 by reversing the related valuation
allowance. Reference is made to Note 9 to the Company's consolidated financial
statements included in the Annual Report on Form 10-K for the year ended
December 31, 1996 for discussion of the Company's deferred taxes and related
valuation allowances.
14
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES (CONTINUED)
QUARTER ENDED JUNE 30, 1997, COMPARED TO THE QUARTER ENDED JUNE 30, 1996
(CONTINUED)
NET INCOME on a consolidated basis for the quarter ended June 30, 1997 was
$4.9 million ($0.28 per share of common stock), an improvement of $2.7 million
from $2.2 million ($0.16 per share of common stock) for the quarter ended June
30, 1996. The improvement primarily resulted from a revenue increase of $27.0
million or 20.6% and a $1.7 million or 28.7% decrease in interest expense which
was partially offset by a related increase in commission expense of $16.2
million or 24.4%, a $6.6 million or 12.3% increase in operating expenses, and an
increase in income tax expense of $3.4 million as described above.
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
REVENUE on a consolidated basis for the six months ended June 30, 1997 was
$292.0 million, an increase of $48.3 million or 19.8% from $243.7 million for
the six months ended June 30, 1996. The overall increase in revenue, compared
to the same period in 1996, reflected a continued improvement in the commercial
real estate markets across the country. This improvement reflected increasing
investor confidence in the national economy and, in particular, real estate
assets, increasing asset values and, as a result, heightened real estate market
liquidity.
Property and User Services revenue was $256.7 million for the six months
ended June 30, 1997, an increase of $44.7 million or 21.1% from $212.0 million
for the six months ended June 30, 1996. Brokerage revenue accounted for $172.2
million, an increase of $27.2 million or 18.7% from $145.0 million, investment
properties revenue accounted for $61.3 million, an increase of $14.0 million or
29.6% from $47.3 million and corporate services revenue was $12.8 million, an
increase of $3.4 million or 35.9% from $9.4 million for the six months ended
June 30, 1996. These increases resulted in part from an increase in the total
number and size of brokerage and investment properties sale transactions closed
during the six months ended June 30, 1997 compared to transactions closed during
the six months ended June 30, 1996. Although the number of lease transactions
declined during the six months ended June 30, 1997 compared to the six months
ended June 30, 1996, the average commission amount for lease transactions
increased resulting in an overall increase in lease revenues.
Investor Services revenue was $35.3 million for the six months ended June 30,
1997, an increase of $3.6 million or 11.4% from $31.7 million for the six months
ended June 30, 1996. Mortgage banking revenue was $11.4 million, an increase of
$4.1 million or 56.8% from $7.3 million primarily as a result of the L.J. Melody
acquisition. Valuation and appraisal services revenue accounted for $9.5
million, an increase of $1.1 million or 13.4% from $8.4 million. Investment
management and advisory revenue was $14.4 million, a decrease of $1.6 million,
or 10.1% from $16.0 million primarily a result of a decrease in fund management
and incentive fees due to fund liquidations, offset in part by an increase in
disposition fees.
COMMISSIONS, FEES AND OTHER INCENTIVES on a consolidated basis for the six
months ended June 30, 1997 were $150.1 million, an increase of $28.8 million or
23.8% from $121.3 million for the six months ended June 30, 1996. The increase
in these costs is largely correlated 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 increased from
49.8% in 1996 to 51.4% in 1997. The increase in commissions, fees and other
incentives as a percentage of revenue is primarily due to the lower revenues in
investment management and advisory, which does not incur this type of revenue-
based expense. Excluding investment management and advisory, commissions, fees
and other incentives as a percent of revenues increased from 53.3% for 1996 to
54.1% for 1997 primarily as a result of higher commission eligibility levels
resulting from the revenue increase.
Property and User Services commissions, fees and other incentives were $140.5
million for the six months ended June 30, 1997, an increase of $26.1 million or
22.8% from $114.4 million for the six months ended June 30, 1996, an increase as
a percentage of revenue from 54.0% in 1996 to 54.7% in 1997 primarily as a
result of higher commission eligibility levels resulting from the revenue
increase.
15
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
(CONTINUED)
Investor Services commissions, fees and other incentives were $9.6 million
for the six months ended June 30, 1997, an increase of $2.7 million or 40.7%
from $6.9 million for the six months ended June 30, 1996. The increase is
primarily a result of an increase in mortgage banking commission eligibility
resulting from the revenue increase and base salary costs related to newly hired
producers. As newly hired producers start generating loan fees, commission
expense as a percentage of revenue should decline.
OPERATING, ADMINISTRATIVE AND OTHER on a consolidated basis for the six
months ended June 30, 1997 was $116.6 million, an increase of $13.4 million or
13.0% from $103.2 million for the six months ended June 30, 1996, and decreased
as a percentage of revenue for such periods from 42.3% to 39.9%. The increase
in the amount is consistent with increased operating activity.
Property and User Services operating, administrative and other was $96.7
million for the six months ended June 30, 1997, an increase of $12.3 million or
14.6% from $84.4 million for the six months ended June 30, 1996, but decreased
as a percentage of revenue from 39.8% to 37.7%. The increase in the amount is a
result of additional personnel requirements and business promotional expenses
which contributed to the increase in revenue as well as an increased incentive
compensation award eligibility based on increased operating results.
Investor Services operating, administrative and other was $19.9 million for
the six months ended June 30, 1997, an increase of $1.1 million or 6.1% from
$18.8 million for the six months ended June 30, 1996, but decreased as a
percentage of revenue from 59.1% to 56.3%. The increase in the amount is
primarily a result of the L.J. Melody acquisition, offset in part by a decrease
in severance payments resulting from the Westmark acquisition.
DEPRECIATION AND AMORTIZATION on a consolidated basis for the six months
ended June 30, 1997 was $6.2 million, a decrease of $0.1 million or 2.3% from
$6.3 million for the six months ended June 30, 1996.
Property and User Services depreciation and amortization was $4.0 million for
the six months ended June 30, 1997, a decrease of $0.7 million or 15.2% from
$4.7 million for the six months ended June 30, 1996 primarily a result of an
increase in fully depreciated assets.
Investor Services depreciation and amortization was $2.2 million for the six
months ended June 30, 1997, an increase of $0.6 million or 36.7% from $1.6
million for the six months ended June 30, 1996 as a result of an increase in
goodwill and intangible amortization related to the L.J. Melody acquisition.
OPERATING INCOME on a consolidated basis for the six months ended June 30,
1997 was $19.1 million, an increase of $6.1 million or 47.6% from $13.0 million
for the six months ended June 30, 1996. The increase in operating income
resulted from an increase in revenue of $48.3 million or 19.8% partially offset
by a related increase in commission expense of $28.8 million or 23.8%, and a
$13.4 million or 13.0% increase in operating expenses as described above.
Property and User Services operating income was $15.5 million for the six
months ended June 30, 1997, an increase of $7.0 million or 83.7% from $8.5
million for the six months ended June 30, 1996. The increase in Property and
User Services operating income resulted from an increase in Property and User
Services revenue of $44.7 million or 21.1% partially offset by a related
increase in commission expense of $26.1 million or 22.8%, and a $12.3 million or
14.6% increase in operating expenses as described above.
Investor Services operating income was $3.6 million for the six months ended
June 30, 1997, a decrease of $0.9 million or 19.5% from $4.5 million for the six
months ended June 30, 1996. The decrease in Investor Services operating income
resulted from an increase in commission expense of $2.7 million or 40.7%, and a
$1.1 million or 6.1% increase in operating expenses as described above,
partially offset by improved Investor Services revenue of $3.6 million or 11.4%.
16
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
(CONTINUED)
INTEREST EXPENSE on a consolidated basis for the six months ended June 30,
1997 was $7.8 million, a decrease of $3.9 million or 32.8% from $11.7 million
for the six months ended June 30, 1996. The decrease is a result of paydowns on
the senior debt primarily resulting from the IPO and paydowns of Westmark
acquisition debt, offset in part by an increase in debt related to the L.J.
Melody acquisition.
NET PROVISION FOR INCOME TAX on a consolidated basis for the six months ended
June 30, 1997 was $5.4 million, compared to $390,000 for the six months ending
June 30, 1996. The 1997 provision is related to positive pretax income and the
use of the full effective tax rate in 1997 resulting from the recognition of a
portion of the Company's deferred tax assets in 1996 by reversing the related
valuation allowance. Reference is made to Note 9 to the Company's consolidated
financial statements included in the Annual Report on Form 10-K for the year
ended December 31, 1996 for discussion of the Company's deferred taxes and
related valuation allowances.
NET INCOME on a consolidated basis for the six months ended June 30, 1997 was
$7.1 million ($0.37 per share of common stock), an improvement of $5.5 million
from $1.6 million ($0.12 per share of common stock) for the six months ended
June 30, 1996. The improvement primarily resulted from a revenue increase of
$48.3 million or 19.8% and a $3.9 million or 33.3% decrease in interest expense
which was partially offset by a related increase in commission expense of $28.8
million or 23.8%, a $13.4 million or 13.0% increase in operating expenses, and
an increase in income tax expense of $5.0 million as described above.
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 finance the
acquisition of CB Commercial Real Estate Group, Inc. and related expenses, in
April 1989 the Company incurred borrowings of $251.0 million, which included
$170.0 million under a senior secured credit agreement (the "Senior Secured
Credit Agreement") and $81.0 million under a senior subordinated credit
agreement (the "Senior Subordinated Credit Agreement"). As of June 30, 1997,
the Company had outstanding $50.2 million under the Senior Secured Credit
Agreement and $16.0 million under a revolving credit facility ("Revolving Credit
Facility A"), no amounts outstanding under its second revolving credit facility
("Revolving Credit Facility B" and together with Revolving Credit Facility A,
the "Revolving Credit Facilities") and $65.9 million under the Senior
Subordinated Credit Agreement. In addition, as of June 30, 1997 the Company had
outstanding other long-term indebtedness, consisting primarily of acquisition
debt, totaling approximately $40.4 million.
In connection with the Offering, the senior secured lenders agreed to amend
the terms of the Senior Secured Credit Agreement. As amended, the Company is
required to make quarterly principal payments of $2.625 million which commenced
March 31, 1997 with a final payment of $5.5 million on December 31, 2001. As
amended, the senior indebtedness bears interest at the rate of LIBOR plus 2.5%,
all of which interest is payable currently. Revolving Credit Facility A permits
maximum borrowings of $20.0 million which must be paid off in full for at least
30 consecutive days in each year commencing with 1997. Revolving Credit
Facility B is a facility that can be used for acquisitions and will bear
interest at LIBOR plus 300 basis points. In connection with the pending Koll
transaction, the Company and its lenders increased Revolving Credit Facility B
from $10.0 million to $50.0 million in May of 1997. The increased commitment
continues for six months, at which time any amount above $10.0 million must be
repaid.
In order to refinance substantially all of the Company's outstanding debt, to
provide for the refinancing of substantially all debt of Koll Real Estate
Services to be assumed pursuant to the merger, and to provide additional
borrowing capacity for the Company for general corporate purposes (including
acquisitions), the Company has received a commitment from Bank of America
National Trust and Savings Association to provide a $300.0 million five-year
revolving credit facility initially priced at LIBOR plus 100 basis points.
Final documentation is being negotiated and a definitive credit agreement is
expected to be signed before the end of August.
17
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES (CONTINUED)
Also in connection with the Offering, the senior subordinated credit terms
were amended. As amended, interest is payable on a current basis commencing
January 1, 1997 and the entire amount outstanding under the Senior Subordinated
Credit Agreement is due on July 23, 2002. The senior subordinated indebtedness
bears interest at a rate of LIBOR plus 1.25% from January 1, 1997 through
December 31, 1998, LIBOR plus 2.0% during 1999, LIBOR plus 3.0% during 2000 and
LIBOR plus 4.0% during 2001 and subsequent periods. Interest in excess of LIBOR
plus 1.25% will be deferred and added to the principal balance of the senior
subordinated indebtedness until the final maturity of the senior subordinated
indebtedness. Interest payments on outstanding senior subordinated debt had been
deferred since June 1994 until the payment in full of the senior secured debt.
The Company expects to have capital expenditures of approximately $5.0
million in 1997, exclusive of acquisitions, for leasehold improvements of
relocated offices resulting from lease expirations, furniture and equipment and
technology-related hardware and software purchases. In connection with the
Westmark acquisition, the sellers may be 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. The Company
expects to use net cash provided by operating activities for the next several
years primarily to fund capital expenditures, acquisitions, including earnout
payments, and to make required principal payments under the Company's
outstanding indebtedness. The Company believes that it can satisfy these
obligations as well as working capital requirements from internally generated
cash flow, borrowings under the Revolving Credit Facilities or any replacement
credit facilities and, with respect to acquisitions that require cash, seller
financing and third-party borrowing. The Company has reached an agreement in
principal to buy out the Westmark supplemental purchase price and a related
incentive plan for $13.5 million. There can be no assurance that this buyout
will be consummated.
Effective October 1996, a dividend on the Company's preferred stock was
reinstated. The $0.25 per share quarterly dividend on the Company's Preferred
Stock has accrued from October 1, 1996, and will result, if and when paid, in a
cost of $1.0 million per quarter. Until the Company has completed its
acquisition program (which could take several years) it does not intend to pay
dividends on the Preferred Stock.
The Company anticipates that its existing sources of liquidity, including
cash flow from operations, will be sufficient to fund its operations for at
least the next twelve months.
CASH FLOWS
Net cash provided by operating activities was $19.2 million for the quarter
ended June 30, 1997 compared to $13.9 million for the quarter ended June 30,
1996. The increase primarily resulted from an increase in net income before
reserves for bonus, profit sharing and income taxes offset in part by payment of
prior quarter end accrued liabilities.
Net cash provided by (used in) investing activities was a use of $0.8 million
for the quarter ended June 30, 1997 compared to $1.8 million that was provided
in the quarter ended June 30, 1996. The 1996 amount reflected a $2.7 million
note receivable collection in 1996.
Net cash used in financing activities was $3.5 million for the quarter ended
June 30, 1997 compared to $4.3 million for the quarter ended June 30, 1996. The
$0.8 million decrease in cash used in financing resulted primarily from the $4.9
million decrease in senior term loan principal payment requirements, offset in
part by a net decrease of $4.3 million in borrowings under the senior revolving
credit line in 1997 over 1996.
Net cash used in operating activities was $3.5 million for the six months
ended June 30, 1997 compared to $2.0 million for the six months ended June 30,
1996. The $0.7 million increase primarily resulted from an increase in net
income before reserves for bonus, profit sharing and income taxes offset
significantly by payment of prior year end accrued liabilities during the first
quarter of the year.
Net cash used in investing activities was $10.6 million for the six months
ended June 30, 1997 compared to $116,000 for the six months ended June 30, 1996
as a result of additional supplemental purchase price payments to the Westmark
and L.J. Melody sellers, an increase in purchases of property and equipment in
1997 and an increase in short term investments in 1997.
18
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES (CONTINUED)
Net cash provided by financing activities was $8.1 million for the six months
ended June 30, 1997 compared to $2.5 million for the six months ended June 30,
1996. The $5.6 million increase in cash provided by financing resulted
primarily from the $6.1 million decrease in senior term loan principal payment
requirements, offset in part by a $1.0 million increase in scheduled repayments
on the Westmark senior subordinated term loan in 1997 over 1996.
RECENT LITIGATION
The Company is a party to a number of pending or threatened lawsuits arising
out of, or incident to, its ordinary course of business. In August 1993, a
former commissioned salesperson of the Company filed a lawsuit against the
Company in the Superior Court of New Jersey, Bergin 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. The Company hired new counsel and in
January 1997 filed motions for a new trial, reversal of the verdict and
reduction of damages. On March 27, 1997 the trial court denied the Company's
motions and awarded the plaintiff $638,000 in attorneys' fees and costs. The
Company has been advised by appellate counsel that it has a meritorious basis to
pursue an appeal of the verdict, which the Company will do. This accrual was
initially established at $250,000 in 1994 and increased to $800,000 in 1995 and
represented the Company's estimate of its loss exposure for this matter based on
its assessment and analysis as of those dates. In 1996, further adjustments were
made to the reserve to reflect the Company's estimate of ultimate loss, if any.
The Company believes its reserves for this case at June 30, 1997 are adequate.
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.
INFLATION
The Company's operations are directly affected by 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 versus general inflation.
19
<PAGE>
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC.
Date: August 13, 1997 /s/ Ronald J. Platisha
_________________________________
Ronald J. Platisha
Executive Vice President,
Principal Accounting Officer
21
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