<PAGE>
================================================================================
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, 2000
[_] 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
------------------------
CB RICHARD ELLIS SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1616016
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 North Sepulveda Boulevard
El Segundo, California 90245-4380
(Address of principal executive offices) (Zip Code)
(310) 563-8600 Not Applicable
(Registrant's telephone (Former name, former address and
number, including area code) formal fiscal year if changed
since last report)
------------------------
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 July 31, 2000 was 20,259,879.
1
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
FORM 10-Q
June 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Consolidated Condensed Financial Statements
Consolidated Balance Sheets at June 30, 2000 (Unaudited) and December 31, 1999............................ 3
Unaudited Consolidated Statements of Operations for the three months ended
June 30, 2000 and 1999 and for the six months ended June 30, 2000 and 1999.............................. 4
Unaudited Consolidated Condensed Statements of Cash Flows for the six months
ended June 30, 2000 and 1999............................................................................ 5
Notes to Consolidated Condensed Financial Statements...................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................ 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 22
Signatures.......................................................................................................... 23
</TABLE>
2
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
A S S E T S
-----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................................... $ 19,195 $ 27,844
Receivables, less allowance of $13,156 and $15,560 for doubtful accounts
at June 30, 2000 and December 31, 1999........................................... 140,202 164,970
Deferred taxes, net................................................................ 11,884 11,758
Prepaid expenses................................................................... 10,888 8,370
Other current assets............................................................... 9,852 17,621
--------- ---------
Total current assets............................................................. 192,021 230,563
Other investments........................................................................ 15,631 5,247
Property and equipment, net.............................................................. 71,427 70,149
Goodwill, net of accumulated amortization of $48,544 and $41,008 at June 30, 2000
and December 31, 1999.............................................................. 431,949 445,010
Other intangible assets, net of accumulated amortization of $283,939 and $279,156
at June 30, 2000 and December 31, 1999............................................. 48,981 57,524
Investment in and advances to unconsolidated subsidiaries................................ 40,539 36,545
Deferred compensation plan cash surrender value.......................................... 37,682 20,442
Deferred taxes, net...................................................................... 27,508 28,190
Prepaid pension costs.................................................................... 24,694 26,323
Other assets............................................................................. 14,493 13,280
---------- ----------
Total assets...................................................................... $ 904,925 $ 933,273
========== ==========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
-------------------------------------------------------------------
Current Liabilities:
Compensation and employee benefits................................................. $ 76,684 $ 113,518
Accounts payable and accrued expenses.............................................. 73,139 103,287
Reserve for bonus and profit sharing............................................... 25,104 52,233
Current maturities of long-term debt............................................... 3,473 5,268
Current portion of capital lease obligations....................................... 1,182 1,497
--------- ---------
Total current liabilities........................................................ 179,582 275,803
Long-term debt:
Revolving credit facility.......................................................... 222,000 160,000
Senior term notes.................................................................. 16,502 16,502
Senior subordinated notes, less unamortized discount of $1,780 and $1,892 at
June 30, 2000 and December 31, 1999.............................................. 173,220 173,108
Other long-term debt............................................................... 6,509 8,262
--------- ---------
Total long-term debt............................................................. 418,231 357,872
Deferred compensation liability.......................................................... 58,438 47,202
Other liabilities........................................................................ 37,165 38,787
--------- ---------
Total liabilities................................................................ 693,416 719,664
Minority interest........................................................................ 3,233 3,872
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value; 8,000,000 shares authorized; no shares issued
or outstanding...................................................................
Common stock, $0.01 par value; 100,000,000 shares authorized; 20,270,560 and
20,435,692 shares outstanding at June 30, 2000 and December 31, 1999............. 213 213
Additional paid-in capital......................................................... 357,931 355,893
Notes receivable from sale of stock................................................ (7,537) (8,087)
Accumulated deficit................................................................ (116,988) (122,485)
Accumulated other comprehensive loss............................................... (9,816) (1,928)
Treasury stock at cost, 1,044,350 shares and 885,100 shares at June 30, 2000
and December 31, 1999............................................................ (15,527) (13,869)
--------- ---------
Total stockholders' equity....................................................... 208,276 209,737
--------- ---------
Total liabilities and stockholders' equity....................................... $ 904,925 $ 933,273
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue.................................................. $ 317,884 $ 277,167 $ 578,803 $ 510,368
Costs and Expenses:
Commissions, fees and other incentives.................. 153,818 122,978 267,216 225,158
Operating, administrative and other..................... 130,790 127,641 258,503 243,592
Depreciation and amortization........................... 10,731 9,968 21,300 19,962
----------- ----------- ----------- -----------
Operating income......................................... 22,545 16,580 31,784 21,656
Interest income.......................................... 92 536 581 1,070
Interest expense......................................... 10,985 10,203 20,670 19,376
----------- ----------- ----------- -----------
Income before provision for income tax................... 11,652 6,913 11,695 3,350
Provision for income tax................................. 6,175 3,557 6,198 1,747
----------- ----------- ----------- -----------
Net income............................................... $ 5,477 $ 3,356 $ 5,497 $ 1,603
=========== =========== =========== ===========
Basic earnings per share................................. $ 0.26 $ 0.16 $ 0.26 $ 0.08
=========== =========== =========== ===========
Weighted average shares outstanding for basic earnings
per share............................................... 20,879,218 21,032,324 20,849,244 20,974,583
=========== =========== =========== ===========
Diluted earnings per share............................... $ 0.26 $ 0.16 $ 0.26 $ 0.08
=========== =========== =========== ===========
Weighted average shares outstanding for diluted
earnings per share...................................... 20,906,117 21,125,074 20,879,026 21,063,019
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 5,497 $ 1,603
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization excluding deferred financing costs........ 21,300 19,962
Gain on sale of property and business................................... (5,027) -
Deferred compensation deferrals......................................... 13,999 5,705
Deferred taxes.......................................................... 706 854
Decrease (increase) in receivables....................................... 20,661 (8,554)
Increase in deferred compensation plan cash surrender value.............. (17,240) -
Decrease in compensation and employee benefits payable and reserve for
bonus and profit share.................................................. (62,448) (35,210)
Decrease in accounts payable and accrued expenses........................ (26,889) (30,206)
Net change in other operating assets and liabilities..................... (1,576) 1,621
-------- --------
Net cash used in operating activities................................. (51,017) (44,225)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment...................................... (11,451) (11,408)
Proceeds from sale of inventoried property............................... - 7,355
Proceeds from sale of property and business.............................. 11,601 -
Purchase of investments.................................................. (11,311) -
Increase in intangible assets and goodwill............................... (1,766) (2,747)
Acquisition of businesses including net assets acquired, intangibles
and goodwill............................................................ (669) (5,227)
Other investing activities, net.......................................... 1,479 (2,460)
-------- --------
Net cash used in investing activities................................. (12,117) (14,487)
-------- --------
Cash flows from financing activities:
Proceeds from revolving credit facility.................................. 134,000 120,000
Repayment of revolving credit facility................................... (72,000) (48,000)
Repayment of inventoried property loan................................... - (7,093)
Repayment of other loans................................................. (3,499) (10,819)
Repayment of capital leases.............................................. (694) (513)
Other financing activities, net.......................................... (2,469) (1,146)
-------- --------
Net cash provided by financing activities............................. 55,338 52,429
-------- --------
Net decrease in cash and cash equivalents.................................. (7,796) (6,283)
Cash and cash equivalents, at beginning of period.......................... 27,844 19,551
Effect of exchange rate changes on cash.................................... (853) (715)
-------- --------
Cash and cash equivalents, at end of period................................ $ 19,195 $ 12,553
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (none capitalized)............................................. $ 21,501 $ 21,260
Income taxes, net....................................................... $ 15,441 $ 7,749
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
Organization. CB Richard Ellis Services, Inc. (the Company) is a holding
company that conducts its operations primarily through approximately 75 direct
and indirect operating subsidiaries. In the United States (US) the Company
operates through CB Richard Ellis, Inc., L.J. Melody & Company (L.J. Melody) and
CB Richard Ellis Investors, L.L.C. (CBRE Investors); in the United Kingdom (UK)
through CB Hillier Parker Limited and in Canada through CB Richard Ellis
Limited. The Company operates through smaller subsidiaries in approximately 33
other countries and pursuant to cooperation agreements in several additional
countries. Approximately 77% of the Company's revenues are from the US and 23%
from the rest of the world.
Nature of Operations. The Company provides a full range of real estate
services to commercial real estate tenants, owners and investors through
approximately 250 offices worldwide including but not limited to the US,
Argentina, Australia, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark,
France, Germany, Hong Kong, Hungary, India, Italy, the Netherlands, New Zealand,
People's Republic of China, Portugal, Singapore, Spain, Sweden, Switzerland,
Taiwan, Turkey and the UK. In July 1999, the Company undertook a reorganization
to streamline its US operations which resulted in a change in its segment
reporting from four to three segments. The Company's services under this new
segmentation include (i) brokerage services whereby the Company facilitates the
sale and lease of properties, transaction management and advisory services, and
investment property transactions, including acquisitions and sales on behalf of
investors (Transaction Management); (ii) capital market activities, including
mortgage banking, brokerage and servicing, investment management and advisory
services, real estate market research and valuation and appraisal services
(Financial Services); and (iii) facilities management services to corporate real
estate users, and property management and related services to owners (Management
Services). The Company's diverse client base includes local, national and
multinational corporations, financial institutions, pension funds and other tax
exempt entities, local, state and national government entities, and individuals.
While the Company provides Transaction Management and Management Services in
most of its 250 offices, Financial Services are primarily provided in the US and
the UK (except appraisal which is offered by most offices).
A significant portion of the Company's revenue is seasonal. Historically,
this seasonality has caused the Company's revenue, operating income and net
income to be lower in the first two calendar quarters and higher in the third
and fourth calendar quarters of each year. In addition, the Company's operations
are directly affected by actual and perceived trends in various national and
economic conditions, including interest rates, the availability of credit to
finance commercial real estate transactions and the impact of tax laws. To date,
the Company does not believe that general inflation has had a material impact on
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.
2. Basis of Preparation
The unaudited consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles in the US
(US GAAP) for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by US GAAP for complete financial
statements.
In the opinion of management, all adjustments and eliminations, consisting
of normal recurring adjustments, necessary for the fair presentation of the
financial statements for the interim periods have been made. Interim results of
operations are not necessarily indicative of the results to be expected for the
full year. For further information, refer to the consolidated financial
statements and accompanying notes included in the Company's annual report on
Form 10-K for the year ended December 31, 1999.
3. Dispositions
In February 2000, the Company sold all of the assets of CBRE
Telecommunications Services, L.L.C. (Telecommunications) for cash proceeds of
$8.4 million, resulting in a pre-tax gain of $4.7 million.
6
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Goodwill and Other Intangible Assets
Net goodwill at June 30, 2000 consisted of $413.3 million related to the
1995 through 2000 acquisitions which is being amortized over an estimated useful
life of 30 years and $18.6 million related to the Company's original acquisition
in 1989 which is being amortized over an estimated useful life of 40 years.
Net other intangible assets at June 30, 2000 included approximately $7.0
million of deferred financing costs and $42.0 million of intangibles stemming
from the 1995 through 2000 acquisitions. These are amortized on a straight line
basis over the estimated useful lives of the assets, ranging from 3 to 15 years.
The Company periodically evaluates the recoverability of the carrying amount
of goodwill and other intangible assets. In this assessment, the Company
considers macro market conditions and trends in the Company's relative market
position, its capital structure, lender relationships and the estimated
undiscounted future cash flows associated with these assets. If any of the
significant assumptions inherent in this assessment materially change due to
market, economic and/or other factors, the recoverability is assessed based on
the revised assumptions and resultant undiscounted cash flows. If such analysis
indicates impairment, it would be recorded in the period such changes occur
based on the fair value of the goodwill and other intangible assets.
5. Other Assets and Other Investments
Included in other assets are $6.3 million in receivables from the 1999 sales
of five non-strategic offices and $4.9 million of notes receivable from stock
options exercised.
In May 2000, the Company purchased a total of $9.0 million of stocks in two
companies, Eureka Broadband Corporation and Eziaz, Inc., as part of its e-
business initiative.
6. Subsequent Event
On July 12, 2000, the Company invested a total of $10.0 million in
SiteStuff, a premier e-marketplace for owners and operators of commercial and
multi-family real estate properties. Through SiteStuff, the Company expects to
purchase property management maintenance, repair and operations products and
services for the benefit of clients in the US.
7. Employee Benefit Plans
In 1994, the Company implemented the Deferred Compensation Plan (DCP). Under
the DCP, a select group of management and highly compensated employees can defer
the payment of all or a portion of their compensation (including any bonus). The
DCP permits participating employees to make an irrevocable election at the
beginning of each year to receive amounts deferred at a future date either in
cash, which is an unsecured long-term liability of the Company, or in shares of
common stock of the Company which elections are recorded as additions to
stockholders' equity. In May 2000, the Company began repurchasing stock from the
open market in order to fund the stock portion of the DCP. At June 30, 2000, the
Company repurchased 158,000 shares of common stock for $1.7 million, which is
reported as an increase to treasury stock. In 1999, the Company revised the DCP
to add insurance products which function like mutual funds as an investment
alternative and to fund the Company's obligation for deferrals invested in such
insurance products. Cash payments for purchase of additional insurance products
are made on the third business day of the following month as compared to the
related DCP participant deferral. As of July 1, 2000, payments will be made
twice a month. For the six months ended June 30, 2000, approximately $14.0
million was deferred and mainly allocated to other investments. The accumulated
non-stock liability at June 30, 2000 was approximately $58.4 million and the
assets (in the form of insurance proceeds) set aside to cover the liability was
$37.7 million. The total liability of $72.4 million was charged to expense in
the period of deferral and classified as deferred compensation plan liability,
except for stock which is included in stockholders' equity. On July 17, 2000,
the Company announced a match of the stock portion of DCP for the Plan Year 1999
in the amount of $4.5 million. The vesting period is over five years with 20%
vesting each year at December 31, 2000 through 2004.
7
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
The Company, through the CB Hillier Parker Limited (HP) acquisition,
maintains a contributory defined benefit pension plan (DBP) to provide
retirement benefits to former HP employees participating in the plan. It is the
Company's policy to fund the minimum annual contributions required by applicable
regulations. At June 30, 2000, DBP plan assets exceeded DBP plan liabilities by
approximately $24.7 million and the net prepaid pension asset is reflected in
the accompanying balance sheet.
In May 2000, the Company amended and restated, effective July 1, 2000, its
1998 employee stock purchase plan designed exclusively for employees who earn
less than $100,000 in total annual compensation. Under the plan, the eligible
employees may purchase common stock by means of contributions to the Company at
a price equal to 90% of the fair market value of such share on the last trading
day of the purchase period. The plan provides for purchases by employees of up
to an aggregate of 150,000 shares each year for 2000, 2001 and 2002.
8. Debt
In October 1999, the Company executed an amendment to the revolving credit
facility, reducing the facility to $350.0 million, eliminating the mandatory
reduction of the facility on December 31, 1999, and revising some of the
restrictive covenants. The new amendment is also subject to mandatory reductions
of the facility by $80.0 million and $70.0 million on December 31, 2000 and
2001, respectively. The amount outstanding under this facility was $222.0
million at June 30, 2000. Interest rate alternatives include Bank of America's
reference rate plus 1.00% and LIBOR plus 2.50%. The weighted average rate on
amounts outstanding at June 30, 2000 was 9.05%.
The revolving credit facility contains numerous restrictive covenants that,
among other things, limit the Company's ability to incur or repay other
indebtedness, make advances or loans to subsidiaries and other entities, make
capital expenditures, incur liens, enter into mergers or effect other
fundamental corporate transactions, sell its assets, or declare dividends. In
addition, the Company is required to meet certain ratios relating to its
adjusted net worth, level of indebtedness, fixed charges and interest coverage.
The Company has Senior Subordinated Notes (Subordinated Notes) due on June
1, 2006. The Subordinated Notes are redeemable in whole or in part after June 1,
2002 at 104.438% of par on that date and at declining prices thereafter. On or
before June 1, 2001, up to 35.0% of the issued amount may be redeemed at
108.875% of par plus accrued interest solely with the proceeds from an equity
offering. The amount included in the accompanying balance sheet for the
Subordinated Notes less unamortized discount was $173.2 million at June 30,
2000.
The Company has a credit agreement with Residential Funding Corporation
(RFC). The credit agreement provides for a revolving line of credit, which bears
interest at 1.25% per annum over LIBOR. The Company may borrow $50.0 million
under the revolving line of credit until August 31, 2000, when the revolving
line of credit expires. During the quarter, the Company had a maximum of $69.3
million revolving line of credit principal outstanding. At June 30, 2000, the
Company had $0.4 million revolving line of credit principal outstanding. The
Company has a temporary line of credit increase of $20.0 million, which expires
on September 1, 2000. On July 19, 2000, the Company executed an amendment to the
revolving line of credit that increased the line of credit to $100.0 million,
decreased the interest rate to 1.0% per annum over LIBOR, extended the
expiration date to August 31, 2001 and increased the temporary line of credit to
$35.0 million.
9. Income Taxes
The provisions for income taxes for the six month periods ended June 30,
2000 and 1999 were computed in accordance with Interpretation No. 18 of
Accounting Principals Board (APB) opinion No. 28 on reporting taxes for interim
periods and were based on projections of total year pre-tax income. In
accordance with APB opinion No. 23, no US taxes have been provided on earnings
of foreign subsidiaries because it is the intent of the Company to permanently
re-invest the unremitted earnings of foreign subsidiaries.
8
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. Commitments and Contingencies
In December 1996, GMH Associates, Inc. (GMH) filed a lawsuit against
Prudential Realty Group (Prudential) and the Company in the Superior Court of
Pennsylvania, Franklin County, alleging various contractual and tort claims
against Prudential, the seller of a large office complex, and the Company, its
agent in the sale, contending that Prudential breached its agreement to sell the
property to GMH, breached its duty to negotiate in good faith, conspired with
the Company to conceal from GMH that Prudential was negotiating to sell the
property to another purchaser and that Prudential and the Company misrepresented
that there were no other negotiations for the sale of the property. Following a
non-jury trial, the court rendered a decision in favor of GMH and against
Prudential and the Company, awarding GMH $20.3 million in compensatory damages,
against Prudential and the Company jointly and severally, and $10.0 million in
punitive damages, allocating the punitive damage award $7.0 million as against
Prudential and $3.0 million as against the Company. Following the denial of
motions by Prudential and the Company for a new trial, a judgment was entered on
December 3, 1998. Prudential and the Company filed an appeal of the judgment. On
March 3, 2000, the appellate court in Pennsylvania reversed all of the trial
courts' decisions finding that liability was not supported on any theory claimed
by GMH and directed that a judgement be entered in favor of the defendants
including the Company. The plaintiff has filed an appeal with the Pennsylvania
Supreme Court.
In August 1993, a former commissioned sales person of the Company filed a
lawsuit against the Company in the Superior Court of New Jersey, Bergen County,
alleging gender discrimination and wrongful termination by the Company. On
November 20, 1996, a jury returned a verdict against the Company, awarding $1.5
million in general damages and $5.0 million in punitive damages to the
plaintiff. Subsequently, the trial court awarded the plaintiff $0.6 million in
attorneys' fees and costs. Following denial by the trial court of the Company's
motions for new trial, reversal of the verdict and reduction of damages, the
Company filed an appeal of the verdict and requested a reduction of damages. On
March 9, 1999, the appellate court ruled in the Company's favor, reversed the
trial court decision and ordered a new trial. On February 16, 2000, the Supreme
Court of New Jersey reversed the decision of the appellate court, concluded that
the general damage award in the trial court should be sustained and returned the
case to the appellate court for a determination as to whether a new trial should
be ordered on the issue of punitive damages. In April 2000, the Company settled
the compensatory damages claim (including interest) and all claims to date with
respect to attorneys fees by paying to the plaintiff the sum of $2.75 million
leaving only the punitive damage claim for resolution (the plaintiff also
agreed, with very limited exceptions, that no matter what the outcome of the
punitive damage claim the Company would not be responsible for more than 50% of
the plaintiff's future attorney fees). Based on available reserves, cash and
anticipated cash flows, the Company believes that the ultimate outcome of this
case will not have an impact on the Company's ability to carry on its
operations.
The Company is a party to a number of pending or threatened lawsuits
arising out of, or incident to, its ordinary course of business. Based on
available cash and anticipated cash flows, the Company believes that the
ultimate outcome will not have an impact on the Company's ability to carry on
its operations. Management believes that any liability to the Company that may
result from disposition of these lawsuits will not have a material effect on the
consolidated financial position or results of operations of the Company.
In 1999, the Company entered into an agreement with Fannie Mae in which the
Company agreed to fund the purchase of a $103.6 million loan portfolio from
proceeds from its RFC line of credit, which was temporarily increased to $135.0
million. A 100% participation in this loan portfolio was subsequently sold to
Fannie Mae with the Company retaining the credit risk on the first 2% of loss
incurred on the underlying portfolio of commercial mortgage loans. The Company
has collateralized a portion of its obligation to cover the first 2% of losses
by pledging a letter of credit in the amount of $1.0 million to Fannie Mae.
The Company has a participation agreement with RFC whereby RFC agrees to
purchase a 99% participation interest in any eligible multifamily mortgage loans
owned by the Company and outstanding at quarter-end. The participation agreement
expires August 31, 2000.
11. Stockholders' Equity
9
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
The translation of foreign currencies into US dollars is performed for
balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using an average exchange rate
for the period. The cumulative gains or losses resulting from translations are
included in other comprehensive loss in stockholders' equity.
The Company completed the 1999 stock repurchase on January 5, 2000. A total
of 397,450 shares of common stock were purchased for a total of approximately
$5.0 million. In May 2000, the Company began repurchasing stock from the open
market in order to fund the stock portion of DCP. At June 30, 2000, the Company
repurchased 158,000 shares of common stock totaling $1.7 million.
12. Comprehensive Loss
Comprehensive loss consists of net income and other comprehensive loss.
Accumulated other comprehensive loss consists of foreign currency translation
adjustments. For the six months ended June 30, 2000, total comprehensive loss
was $2.4 million which includes foreign currency translation loss of $7.9
million. For the six months ended June 30, 1999, total comprehensive loss was
$3.9 million which includes foreign currency translation loss of $5.5 million.
13. Per Share Information
Basic earnings per share was computed by dividing net income by the
weighted average number of common shares outstanding during each period. The
computation of diluted earnings per share further assumes the dilutive effect of
stock options and stock warrants. 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.
10
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following is a calculation of basic and diluted earnings per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30
-----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Net income.......................................... $5,477 20,879,218 $0.26 $3,356 21,032,324 $0.16
====== ========== ===== ====== ========== =========
Diluted earnings per share
Net income.......................................... $5,477 20,879,218 $3,356 21,032,324
Diluted effect of exercise of options outstanding... 26,899 92,750
------- ---------- ------- ----------
Net income.......................................... $5,477 20,906,117 $0.26 $3,356 21,125,074 $0.16
====== ========== ===== ====== ========== =========
Six Months Ended June 30
-----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Net income.......................................... $5,497 20,849,244 $0.26 $1,603 20,974,583 $0.08
====== ========== ===== ====== ========== =========
Diluted earnings per share
Net Income.......................................... $5,497 20,849,244 $1,603 20,974,583
Diluted effect of exercise of options outstanding... 29,782 88,436
------ ---------- ------ ----------
Net income.......................................... $5,497 20,879,026 $0.26 $1,603 21,063,019 $0.08
====== ========== ===== ====== ========== =========
</TABLE>
The following items were not included in the computation of diluted
earnings per share because their effect was anti-dilutive for the periods ended
June 30:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
---------------------------------- -----------------------------------
2000 1999 2000 1999
-------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Stock options
Outstanding......... 2,433,342 1,889,786 2,413,342 1,947,999
Price ranges........ $10.38-$36.75 $19.44-$37.31 $11.81-$36.75 $18.04-$37.31
Expiration ranges... 6/8/04-3/1/10 11/24/06-7/22/08 6/8/04-9/30/09 4/15/06-7/22/08
Stock warrants
Outstanding......... 598,719 599,967 598,719 599,967
Price $30.00 $30.00 $30.00 $30.00
Expiration.......... 8/28/04 8/28/04 8/28/04 8/28/04
</TABLE>
14. Reclassification
Certain reclassifications, which do not have any effect on net income, have
been made to certain prior period financial statements to conform to the June
2000 presentation.
11
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
15. Industry Segments
In July 1999, the Company announced that it changed its segment reporting
from four segments to three segments. Prior periods were restated to conform to
the new segmentation. The three segments are Transaction Management, Financial
Services and Management Services. The factors for determining the reportable
segments were based on the type of service and client and on the way the chief
operating decision makers organize segments within the Company for making
operating decisions and assessing performance. Each business segment requires
and is responsible for executing a unique marketing and business strategy.
Transaction Management consists of commercial property sales and leasing
services, transaction management and advisory services and investment property
services (acquisitions and sales on behalf of investors). Financial Services
consists of mortgage loan origination and servicing through L.J. Melody,
investment management and advisory services through CBRE Investors, capital
markets activities, valuation and appraisal services and real estate market
research. Management Services consists of facilities and property management and
related services. The current year results of Management Services include a
nonrecurring gain of $4.7 million from the sale of Telecommunications. The
following unaudited table summarizes the revenue, cost and expenses, and
operating income by operating segment for the periods ended June 30, 2000 and
1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenue
Transaction Management.................. $230,222 $198,189 $408,681 $357,324
Financial Services...................... 51,375 41,807 92,772 79,752
Management Services..................... 36,287 37,171 77,350 73,292
-------- -------- -------- --------
$317,884 $277,167 $578,803 $510,368
======== ======== ======== ========
Operating income (loss)
Transaction Management.................. $ 18,344 $ 16,330 $ 22,975 $ 20,390
Financial Services...................... 4,578 98 5,383 1,224
Management Services..................... (377) 152 3,426 42
-------- -------- -------- --------
22,545 16,580 31,784 21,656
Interest income.......................... 92 536 581 1,070
Interest expense......................... 10,985 10,203 20,670 19,376
-------- -------- -------- --------
Income before provision for income tax... $ 11,652 $ 6,913 $ 11,695 $ 3,350
======== ======== ======== ========
Geographic Information
Revenue
United States........................... $245,700 $215,236 $444,200 $395,637
All other countries..................... 72,184 61,931 134,603 114,731
-------- -------- -------- --------
$317,884 $277,167 $578,803 $510,368
======== ======== ======== ========
</TABLE>
12
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction -
The Company provides real estate services through approximately 250 offices
worldwide including but not limited to the United States (US), Argentina,
Australia, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark, France,
Germany, Hong Kong, Hungary, India, Italy, the Netherlands, New Zealand,
People's Republic of China, Portugal, Singapore, Spain, Sweden, Switzerland,
Taiwan, Turkey and the 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 US real
estate broker to being a diversified global real estate services firm. The
Company's Transaction Management is one of the largest such businesses in the
US.
As part of its strategic emphasis in developing a worldwide business, the
Company has, since the beginning of 1995, completed multiple acquisitions, an
$87.0 million public offering of common stock and a $175.0 million offering of
senior subordinated notes. The Company is continually assessing acquisition
opportunities as part of its growth strategy. Because of the substantial non-
cash goodwill and intangible amortization charges incurred by the Company in
connection with acquisitions subject to purchase accounting and because of
interest expense associated with cash acquisition financing, management
anticipates that past acquisitions have and future acquisitions may adversely
affect net income, especially in the first several years following the
acquisition. This problem is compounded when, as in the case of the 1997
acquisition of Koll Real Estate Services (Koll), the amortization of goodwill
must be deducted for financial reporting purposes but is not deductible for tax
purposes with the result that the provision for taxes for financial reporting
purposes will for some period of time be 50--55% when the actual cash tax rate
is 40--45%. In addition, during the first six months following an acquisition,
the Company believes there are generally significant one-time costs relating to
integrating information technology, accounting and management services and
rationalizing personnel levels of the combined operation (costs which the
Company intends to take as a single charge at the time of the acquisition to the
maximum extent permissible). Management does not intend to pursue acquisitions
unless they are accretive to income before interest expense and provision for
amortization of goodwill and intangibles and to operating cash flows (excluding
the costs of integration).
Revenue from Transaction Management, which constitutes a substantial majority
of the Company's revenue, is subject to economic cycles. However, the Company's
significant size, geographic coverage, number of transactions and large
continuing client base tend to minimize the impact of economic cycles on annual
revenue and create what the Company believes is equivalent to a recurring stream
of revenue. Approximately 55% of the costs and expenses associated with
Transaction Management are directly correlated to revenue while approximately
24% of the costs and expenses of Management Services and Financial Services, are
directly correlated to revenue.
A significant portion of the Company's revenue is seasonal. Historically,
this seasonality has caused the Company's revenue, operating income and net
income to be lower in the first two calendar quarters and higher in the third
and fourth calendar quarters of each year. In addition, the Company's operations
are directly affected by actual and perceived trends in various national and
economic conditions, including interest rates, the availability of credit to
finance commercial real estate transactions and the impact of tax laws. To date,
the Company does not believe that general inflation has had a material impact
upon its operations. Revenues, commissions and other variable costs related to
revenues are primarily affected by real estate market supply and demand rather
than general inflation.
13
<PAGE>
CB RICHARD ELLIS SERVICES, INC. (continued)
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>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......................... $317,884 100.0% $277,167 100.0% $578,803 100.0% $510,368 100.0%
Costs and expenses:
Commissions, fees and other
incentives..................... 153,818 48.4 122,978 44.4 267,216 46.2 225,158 44.1
Operating, administrative
and other...................... 130,790 41.1 127,641 46.0 258,503 44.6 243,592 47.7
Depreciation and amortization... 10,731 3.4 9,968 3.6 21,300 3.7 19,962 3.9
-------- ----- -------- ----- -------- ----- -------- -----
Operating income................. 22,545 7.1 16,580 6.0 31,784 5.5 21,656 4.3
Interest income.................. 92 - 536 0.2 581 0.1 1,070 0.2
Interest expense................. 10,985 3.4 10,203 3.7 20,670 3.6 19,376 3.8
-------- ----- -------- ----- -------- ----- -------- -----
Income before provision for
income tax...................... 11,652 3.7 6,913 2.5 11,695 2.0 3,350 0.7
Provision for income tax......... 6,175 2.0 3,557 1.3 6,198 1.1 1,747 0.4
-------- ----- -------- ----- -------- ----- -------- -----
Net income....................... $ 5,477 1.7% $ 3,356 1.2% $ 5,497 0.9% $ 1,603 0.3%
======== ===== ======== ===== ======== ===== ======== =====
EBITDA........................... $ 33,276 10.5% $ 26,548 9.6% $ 53,084 9.2% $ 41,618 8.2%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
The Company reported consolidated net income of $5.5 million, or $0.26
diluted earnings per share for the three months ended June 30, 2000 on revenues
of $317.9 million compared to consolidated net income of $3.4 million, or $0.16
diluted earnings per share on revenues of $277.2 million for the three months
ended June 30, 1999.
Revenues on a consolidated basis increased by $40.7 million or 14.7% for the
three months ended June 30, 2000, compared to the three months ended June 30,
1999. This was driven by a 34.5% increase in lease revenue. Loan origination and
servicing fees were higher due to the acquisition of Eberhardt Company late in
1999. In addition, the mortgage banking operation benefited from a number of
high dollar transactions completed in the current quarter.
Commissions, fees and other incentives totaled $153.8 million on a
consolidated basis, a 25.1% increase from the second quarter of 1999 due mainly
to higher lease commissions. In addition, variable commissions, which increase
as a percentage of revenue as certain earnings levels are met, became effective
earlier than prior year due to the higher overall revenue. As a result,
commissions as a percentage of revenue increased from 44.4% to 48.4% during the
current quarter.
Operating, administrative and other on a consolidated basis was $130.8
million, an increase of $3.1 million or 2.5% as compared to the second quarter
of 1999. This is mainly due to higher bonus incentives and profit share driven
by the better quarterly results. Salary and payroll expenses decreased due to
reduced personnel requirements in North America, offset slightly by higher
international costs.
Consolidated interest income was $0.1 million and $0.5 million for the three
months ended June 30, 2000 and 1999, respectively.
Consolidated interest expense was $11.0 million, an increase of $0.8 million
or 7.7% for the quarter. This primarily resulted from the renewal of the
revolving credit facility at a higher borrowing rate offset by slightly lower
average borrowing levels during the current quarter.
Provision for income tax on a consolidated basis was $6.2 million for the
three months ended June 30, 2000, as
14
<PAGE>
CB RICHARD ELLIS SERVICES, INC. (continued)
compared to $3.6 million for the three months ended June 30, 1999. The increase
is mainly attributable to an increase in pre-tax book income for the year. The
effective tax rate was 53.0% for the three months ended June 30, 2000 as
compared to 51.5% for the three months ended June 30, 1999. The effective tax
rate increased mainly due to an increase in income earned in higher tax
locations in the current quarter.
EBITDA was $33.3 million for the three months ended June 30, 2000, as
compared to $26.5 million for the three months ended June 30, 1999. 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 generated (subject to
the payment of interest and income taxes) that can be used by the Company to
service its debt and for other required or discretionary purposes. Net cash that
will be available to the Company for discretionary purposes represents remaining
cash after debt service and other cash requirements, such as capital
expenditures, are deducted from EBITDA. EBITDA should not be considered as an
alternative to (i) operating income determined in accordance with US GAAP or
(ii) operating cash flow determined in accordance with US GAAP.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
The Company reported consolidated net income of $5.5 million, or $0.26
diluted earnings per share for the six months ended June 30, 2000 on revenues of
$578.8 million compared to consolidated net income of $1.6 million, or $0.08
diluted earnings per share, on revenues of $510.4 million for the six months
ended June 30, 1999. The current year-to-date results include a $4.7 million
non-recurring gain from the sale of Telecommunications.
Revenues on a consolidated basis increased by $68.4 million or 13.4% for the
current year, mainly due to increased lease revenue of $52.6 million. Investment
management fees grew due to higher managed account assets, both in North America
and Asia. Loan origination and servicing fees increased due to the acquisition
of Eberhardt Company in late 1999. Mortgage banking also completed a number of
high dollar transactions which increased the average fee per deal approximately
20.0% over prior year.
Commissions, fees and other incentives on a consolidated basis totaled $267.2
million, an increase of 18.7% from prior year. Lease commissions rose
significantly due to the higher lease revenue. In addition, the overall revenue
growth resulted in higher variable commission expense compared to prior year and
contributed to an increase in commissions as a percentage of revenue from 44.1%
to 46.2% for the current year. Variable commissions increase as a percentage of
revenue as certain earnings levels are met.
Operating, administrative and other on a consolidated basis increased by
$14.9 million or 6.1% to $258.5 million, compared to the six months ended June
30, 1999. The increase is mainly attributable to higher bonus incentives and
profit share due to the better current year results, greater personnel
requirements in the international operations and lower earnings from
unconsolidated subsidiaries.
Consolidated interest income equaled $0.6 million as compared to $1.1 million
in prior year.
Consolidated interest expense of $20.7 million increased by $1.3 million or
6.7% in the current year, due to higher interest rates for the revolving credit
facility, offset slightly by lower average borrowing levels compared to prior
year.
Provision for income tax on a consolidated basis was $6.2 million for the six
months ended June 30, 2000, as compared to $1.7 million for the six months ended
June 30, 1999. The increase is mainly due to the increase in pre-tax book income
for the year. The effective tax rate was 53.0% for the six months ended June 30,
2000 as compared to 52.1% for the six months ended June 30, 1999. The effective
tax rate increased mainly due to an increase in income earned in higher tax
locations in the current year.
EBITDA was $53.1 million for the six months ended June 30, 2000, as compared
to $41.6 million for the six months ended June 30, 1999.
15
<PAGE>
CB RICHARD ELLIS SERVICES, INC. (continued)
Segment Operations
In July 1999, the Company announced that it changed its segment reporting
from four segments to three segments. Prior periods were restated to conform to
the new segmentation. The three segments are Transaction Management, Financial
Services and Management Services. The factors for determining the reportable
segments were based on the type of service and client and on the way the chief
operating decision makers organize segments within the Company for making
operating decisions and assessing performance. Each business segment requires
and is responsible for executing a unique marketing and business strategy.
Transaction Management consists of commercial property sales and leasing
services, transaction management and advisory services and investment property
services (acquisitions and sales on behalf of investors). Financial Services
consists of mortgage loan origination and servicing through L.J. Melody &
Company, investment management and advisory services through CB Richard Ellis
Investors, L.L.C., capital markets activities, valuation and appraisal services
and real estate market research. Management Services consists of facilities and
property management and related services. The current year results of Management
Services include a nonrecurring gain of $4.7 million from the sale of
Telecommunications. The following unaudited table summarizes the revenue, cost
and expenses, and operating income by operating segment for the periods ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Transaction Management
Revenue:
Leases...................... $131,191 57.0% $ 98,072 49.5% $224,194 54.9% $174,969 49.0%
Sales....................... 84,398 36.7 87,153 44.0 157,446 38.5 157,620 44.1
Other consulting and
referral fees.............. 14,633 6.3 12,964 6.5 27,041 6.6 24,735 6.9
-------- ----- -------- ----- -------- ----- -------- -----
Total revenue............... 230,222 100.0% 198,189 100.0% 408,681 100.0% $357,324 100.0%
Costs and expenses:
Commissions, fees and
other incentives.......... 131,522 57.1 104,097 52.5 226,434 55.4 189,689 53.1
Operating, administrative
and other................. 75,319 32.7 73,235 37.0 149,284 36.5 138,456 38.7
Depreciation and
amortization.............. 5,037 2.2 4,527 2.3 9,988 2.5 8,789 2.5
-------- ----- -------- ----- -------- ----- -------- -----
Operating income.............. $ 18,344 8.0% $ 16,330 8.2% $ 22,975 5.6% $ 20,390 5.7%
======== ===== ======== ===== ======== ===== ======== =====
EBITDA........................ $ 23,381 10.2% $ 20,857 10.5% $ 32,963 8.1% $ 29,179 8.2%
======== ===== ======== ===== ======== ===== ======== =====
Financial Services
Revenue:
Appraisal fees.............. $ 18,677 36.3% $ 18,461 44.2% $ 34,618 37.3% $ 34,673 43.5%
Loan origination and
servicing fees............ 13,807 26.9 10,844 25.9 23,037 24.8 18,792 23.5
Investment management fees.. 9,041 17.6 6,895 16.5 15,758 17.0 12,427 15.6
Other....................... 9,850 19.2 5,607 13.4 19,359 20.9 13,860 17.4
-------- ----- -------- ----- -------- ----- -------- -----
Total revenue............... 51,375 100.0% 41,807 100.0% 92,772 100.0% 79,752 100.0%
Costs and expenses:
Commissions, fees and
other incentives.......... 15,916 31.0 12,962 31.0 28,123 30.3 24,212 30.4
Operating, administrative
and other................. 27,836 54.2 25,599 61.2 53,241 57.4 47,860 60.0
Depreciation and
amortization.............. 3,045 5.9 3,148 7.6 6,025 6.5 6,456 8.1
-------- ----- -------- ----- -------- ----- -------- -----
Operating income.............. $ 4,578 8.9% $ 98 0.2% $ 5,383 5.8% $ 1,224 1.5%
======== ===== ======== ===== ======== ===== ======== =====
EBITDA........................ $ 7,623 14.8% $ 3,246 7.8% $ 11,408 12.3% $ 7,680 9.6%
======== ===== ======== ===== ======== ===== ======== =====
Management Services
Revenue:
Property management fees.... $ 20,810 57.4% $ 20,593 55.4% $ 40,366 52.2% $ 41,209 56.2%
Facilities management fees.. 4,117 11.3 5,407 14.6 9,086 11.7 10,608 14.5
Leases...................... 6,728 18.5 4,995 13.4 11,955 15.5 9,445 12.9
Sales....................... 1,662 4.6 1,307 3.5 3,099 4.0 2,180 3.0
Other....................... 2,970 8.2 4,869 13.1 12,844 16.6 9,850 13.4
-------- ----- -------- ----- -------- ----- -------- -----
Total revenue............... 36,287 100.0% 37,171 100.0% 77,350 100.0% 73,292 100.0%
Costs and expenses:
Commissions, fees and
other incentives.......... 6,380 17.6 5,919 15.9 12,659 16.3 11,257 15.4
Operating, administrative
and other................. 27,635 76.1 28,807 77.5 55,978 72.4 57,276 78.1
Depreciation and
amortization.............. 2,649 7.3 2,293 6.2 5,287 6.9 4,717 6.4
-------- ----- -------- ----- -------- ----- -------- -----
Operating income (loss)....... $ (377) (1.0)% $ 152 0.4% $ 3,426 4.4% $ 42 0.1%
======== ===== ======== ===== ======== ===== ======== =====
EBITDA........................ $ 2,272 6.3% $ 2,445 6.6% $ 8,713 11.3% $ 4,759 6.5%
======== ===== ======== ===== ======== ===== ======== =====
Total operating income......... $ 22,545 $ 16,580 $ 31,784 $ 21,656
======== ======== ======== ========
Total EBITDA................... $ 33,276 $ 26,548 $ 53,084 $ 41,618
======== ======== ======== ========
</TABLE>
16
<PAGE>
CB RICHARD ELLIS SERVICES, INC. (continued)
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Transaction Management
Revenue increased by $32.0 million or 16.2% for the three months ended June
30, 2000, compared to the three months ended June 30, 1999, due primarily to an
increase in lease revenue. Commissions, fees and other incentives increased by
$27.4 million or 26.3% for the three months ended June 30, 2000, compared to the
three months ended June 30, 1999. This is mainly attributable to higher lease
commissions. In addition, the overall revenue growth resulted in higher variable
commissions which increases as a percentage of revenue as certain earnings
levels are met. As a result, commissions as a percentage of revenue increased
from 52.5% to 57.1% in the current quarter. Operating, administrative, and other
increased by $2.1 million or 2.8% for the three months ended June 30, 2000,
compared to the three months ended June 30, 1999. This increase is a result of
higher bonus incentives and profit share due to the more favorable quarterly
results. This is slightly offset by decreased personnel requirements in North
America and Asia.
Financial Services
Revenue increased by $9.6 million or 22.9% for the three months ended June
30, 2000, compared to the three months ended June 30, 1999. Loan origination and
servicing fees increased due to the acquisition of Eberhardt Company late in
1999. In addition, a number of high dollar transactions were completed in the
current quarter. Investment management fees increased by 31.1% due to higher
managed account assets in North America and Asia. Commissions, fees and other
incentives increased by $3.0 million or 22.8% for the three months ended June
30, 2000, compared to the three months ended June 30, 1999. The increase is
attributable to the overall increase in revenue. As a percentage of revenue,
commissions, fees and other incentives remained unchanged at 31.0% for both the
current and prior year quarters. Operating, administrative, and other increased
by $2.2 million or 8.7% for the three months ended June 30, 2000, compared to
the three months ended June 30, 1999. This is primarily due to higher bonus
incentives and profit share attributable to the better quarterly performance.
Management Services
Revenue decreased by $0.9 million or 2.4% for the three months ended June 30,
2000, compared to the three months ended June 30, 1999, primarily due to lower
facilities management revenue. This was slightly offset by higher lease and
sales revenues. Commissions, fees and other incentives increased by $0.5 million
or 7.8% for the three months ended June 30, 2000 compared to the three months
ended June 30, 1999, primarily due to increased sales and lease commissions.
Operating, administrative and other decreased by $1.2 million or 4.1% for the
quarter due to lower personnel requirements, mainly in North America. As a
percentage of revenue, operating, administrative and other decreased from 77.5%
to 76.1% in the current quarter.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Transaction Management
Revenue increased by $51.4 million or 14.4% for the six months ended June 30,
2000, compared to the six months ended June 30, 1999. The increase was primarily
due to higher lease revenues of $49.2 million. Commissions, fees and other
incentives increased by $36.7 million or 19.4% for the six months ended June 30,
2000, compared to the six months ended June 30, 1999, primarily due to higher
lease commissions. In addition, variable commission expense grew due to the
higher overall revenue, resulting in commissions as a percentage of revenues to
increase from 53.1% to 55.4% for the current year. Variable commissions increase
as a percentage of revenue as certain earnings levels are met. Operating,
administrative, and other increased by $10.8 million or 7.8% as a result of
higher bonus incentives and profit share due to the more favorable year-to-date
results. In addition, salary related expense increased due to higher personnel
requirements in the international operations. Depreciation and amortization
increased by $1.2 million or 13.6% in the current year, primarily as a result of
additional investments in computer hardware and software.
Financial Services
Revenue increased by $13.0 million or 16.3% for the six months ended June 30,
2000, compared to the six months ended June 30, 1999. The increase in revenue is
primarily due to higher loan origination and servicing fees due to the
acquisition of Eberhardt Company late in 1999. Additionally, the mortgage
banking business completed several large transactions in the first half of 2000
that increased the average fee per deal approximately 20.0% over the prior year.
17
<PAGE>
CB RICHARD ELLIS SERVICES, INC. (continued)
Commissions, fees and other incentives increased by $3.9 million or 16.2% for
the six months ended June 30, 2000, compared to the six months ended June 30,
1999. This increase is mainly due to the increase in loan commissions. As a
percentage of revenue, commissions, fees and other incentives remained flat at
30.3% and 30.4% for year-to-date June 30, 2000 and 1999, respectively.
Operating, administrative, and other increased by $5.4 million or 11.2% for the
six months ended June 30, 2000, compared to the six months ended June 30, 1999,
due to higher bonus incentives and profit share attributable to the more
favorable current year results, as well as lower earnings from unconsolidated
subsidiaries.
Management Services
Revenue increased by $4.1 million or 5.5% for the six months ended June 30,
2000, compared to the six months ended June 30, 1999, primarily due to the
nonrecurring gain of $4.7 million from the sale of Telecommunications during the
first quarter. In addition, lease revenue increased by 26.6%, offsetting the
lower facilities management revenue. Commissions, fees and other incentives
increased by $1.4 million or 12.5% for the six months ended June 30, 2000
compared to the six months ended June 30, 1999, attributable mainly to the
increase in lease commissions. Operating, administrative, and other decreased by
$1.3 million or 2.3% for the six months ended June 30, 2000, compared to the six
months ended June 30, 1999. The decrease is primarily due to lower personnel
requirements, mainly in North America. As a percentage of revenue, operating,
administrative and other decreased from 78.1% to 72.4% for the current year.
Liquidity and Capital Resources
The Company has historically financed its operations and non-acquisition
related capital expenditures primarily with internally generated funds and
borrowings under a revolving credit facility. The Company had additional net
borrowings of $62.0 million under the revolving credit facility during the six
months ended June 30, 2000 in order to fund higher working capital requirements.
The Company's EBITDA was $53.1 million and $41.6 million for the six months
ended June 30, 2000 and 1999, respectively. The increase in EBITDA reflects the
overall period to period revenue increase as discussed in the Results of
Operations.
Net cash used in operating activities was $51.0 million for the six months
ended June 30, 2000, compared to $44.2 million for the six months ended June 30,
1999. The change is primarily due to higher incentive payments made during the
first quarter, offset by increased receivable collections. In addition, the
Company had current DCP deferrals of $14.0 million. This is offset by current
year premium payments of $16.5 million invested in the cash surrender value of
insurance products which function like mutual funds as an investment alternative
for the DCP (see Note 7).
Net cash used in investing activities was $12.1 million for the six months
ended June 30, 2000, compared to $14.5 million for the six months ended June 30,
1999. The change is primarily due to the sale of Telecommunications and receipt
of proceeds from the 1999 sale of a risk management operation as compared to the
sale of inventoried property in prior year. In addition, the Company purchased
stock in two corporations for $9.0 million during the current quarter as part of
the Company's overall e-business strategy.
Net cash provided by financing activities was $55.3 million for the six
months ended June 30, 2000, compared to $52.4 million for the six months ended
June 30, 1999. The increase is primarily due to the prior year repayment of a
loan on inventoried property offset by lower financing in the current year from
the revolving credit facility.
In October 1999, the Company executed an amendment to the revolving credit
facility, reducing the facility to $350.0 million, eliminating the mandatory
reduction of the facility on December 31, 1999, and revising some of the
restrictive covenants. The new amendment is also subject to mandatory reductions
of the facility by $80.0 million and $70.0 million on December 31, 2000 and
2001, respectively. The amount outstanding under this facility was $222.0
million at June 30, 2000 which is included in the accompanying consolidated
balance sheets. Interest rate alternatives include Bank of America's reference
rate plus 1.00% and LIBOR plus 2.50%. The weighted average rate on amounts
outstanding at June 30, 2000 was 9.05%.
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.
18
<PAGE>
CB RICHARD ELLIS SERVICES, INC. (continued)
The Company expects to have capital expenditures ranging from $15 million to
$25 million in 2000. The Company expects to use net cash provided by operating
activities for the next several years primarily to fund capital expenditures for
computer related purchases, acquisitions, including earnout payments, and to
make required principal payments under the Company's outstanding indebtedness.
The Company believes that it can satisfy its non-acquisition obligations as well
as working capital requirements from internally generated cash flow, borrowings
under the amended revolving credit facility or any replacement credit
facilities. Material future acquisitions, if any, that require cash will require
new sources of capital such as an expansion of the amended revolving credit
facility and raising money by issuing additional debt or equity. The Company
anticipates that its existing sources of liquidity, including cash flow from
operations, will be sufficient to meet the Company's anticipated non-acquisition
cash requirements for the foreseeable future and in any event for at least the
next twelve months.
The Company completed the 1999 stock repurchase program on January 5, 2000. A
total of 397,450 shares of common stock were purchased for a total of
approximately $5.0 million. In addition, the Company began repurchasing stock
from the open market in May 2000 in order to fund the stock portion of DCP. At
June 30, 2000, the Company repurchased 158,000 shares of common stock for $1.7
million.
Euro Conversion Disclosure
A majority of the European Union member countries converted to a common
currency, the "Euro," on January 1, 1999. The existing legacy currencies of the
participating countries will continue to be acceptable until January 1, 2002.
The Company does not expect the introduction of the Euro to have a significant
impact on its market or the manner in which it conducts business, and believes
the related impact on the Company's financials is not material. The Company is
currently using both the Euro and legacy currencies to conduct business in these
member countries.
The Company is in the process of replacing or upgrading the various items of
hardware and software to allow for dual-currency reporting during the transition
period, and issues related but not limited to converting amounts and rounding.
The Company anticipates these system upgrades will be fully functional prior to
the end of the transition period.
Litigation
In December 1996, GMH Associates, Inc. (GMH) filed a lawsuit against
Prudential Realty Group (Prudential) and the Company in the Superior Court of
Pennsylvania, Franklin County, alleging various contractual and tort claims
against Prudential, the seller of a large office complex, and the Company, its
agent in the sale, contending that Prudential breached its agreement to sell the
property to GMH, breached its duty to negotiate in good faith, conspired with
the Company to conceal from GMH that Prudential was negotiating to sell the
property to another purchaser and that Prudential and the Company misrepresented
that there were no other negotiations for the sale of the property. Following a
non-jury trial, the court rendered a decision in favor of GMH and against
Prudential and the Company, awarding GMH $20.3 million in compensatory damages,
against Prudential and the Company jointly and severally, and $10.0 million in
punitive damages, allocating the punitive damage award $7.0 million as against
Prudential and $3.0 million as against the Company. Following the denial of
motions by Prudential and the Company for a new trial, a judgment was entered on
December 3, 1998. Prudential and the Company filed an appeal of the judgment. On
March 3, 2000, the appellate court in Pennsylvania reversed all of the trial
courts' decisions finding that liability was not supported on any theory claimed
by GMH and directed that a judgement be entered in favor of the defendants
including the Company. The plaintiff has filed an appeal with the Pennsylvania
Supreme Court.
In August 1993, a former commissioned sales person of the Company filed a
lawsuit against the Company in the Superior Court of New Jersey, Bergen County,
alleging gender discrimination and wrongful termination by the Company. On
November 20, 1996, a jury returned a verdict against the Company, awarding $1.5
million in general damages and $5.0 million in punitive damages to the
plaintiff. Subsequently, the trial court awarded the plaintiff $0.6 million in
attorneys' fees and costs. Following denial by the trial court of the Company's
motions for new trial, reversal of the verdict and reduction of damages, the
Company filed an appeal of the verdict and requested a reduction of damages. On
March 9, 1999, the appellate court ruled in the Company's favor, reversed the
trial court decision and ordered a new trial. On February 16, 2000, the Supreme
Court of New Jersey reversed the decision of the appellate court, concluded that
the general damage award in the trial court should be sustained and returned the
case to the appellate court for a determination as to whether a new trial should
be ordered on the issue of punitive damages. In April 2000, the Company settled
the compensatory damages claim (including interest) and all claims to date with
respect to attorneys fees by paying to the plaintiff the sum of $2.75 million
leaving only the punitive damage claim for resolution (the plaintiff also
19
<PAGE>
CB RICHARD ELLIS SERVICES, INC. (continued)
agreed, with very limited exceptions, that no matter what the outcome of the
punitive damage claim the Company would not be responsible for more than 50% of
the plaintiff's future attorney fees). Based on available reserves, cash and
anticipated cash flows, the Company believes that the ultimate outcome of this
case will not have an impact on the Company's ability to carry on its
operations.
The Company is a party to a number of pending or threatened lawsuits arising
out of, or incident to, its ordinary course of business. Based on available cash
and anticipated cash flows, the Company believes that the ultimate outcome will
not have an impact on the Company's ability to carry on its operations.
Management believes that any liability to the Company that may result from
disposition of these lawsuits will not have a material effect on the
consolidated financial position or results of operations of the Company.
Net Operating Losses
The Company had US federal income tax NOLs of approximately $57.4 million at
December 31, 1999, corresponding to $20.1 million of the Company's $60.3 million
in net deferred tax assets before valuation allowances, which expire in the
years 2004 to 2008.
The ability of the Company to utilize NOLs was limited in 1999 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
million of its NOL in 2000 and in each subsequent year. The amount of NOLs is,
in any event, subject to some uncertainty until the statute of limitation
lapses.
New Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 138, Accounting for Certain
Hedging Activities - an Amendment of FASB Statement No. 133. SFAS No. 138 amends
the accounting and reporting for certain derivative instruments and hedging
activities and is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS 138 is not expected to have a material
impact on earnings or other components of comprehensive income of the Company.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, which deferred the effective date of SFAS No. 133 for one
year. SFAS No. 137 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 137 is not expected to have a material
impact on earnings or other components of comprehensive income as the Company
had no derivatives outstanding at June 30, 2000.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is not expected to
have a material impact on earnings or other components of comprehensive income
as the Company had no derivatives outstanding at June 30, 2000.
20
<PAGE>
CB RICHARD ELLIS SERVICES, INC. (continued)
ITEM 3. 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.
Approximately 23% 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. At June 30, 2000, the Company had no
outstanding contracts. The Company does not engage in any speculative
activities.
The Company manages its interest expense by using a combination of fixed and
variable rate debt. The Company utilizes sensitivity analyses to assess the
potential effect of its variable rate debt. If interest rates were to increase
by 90 basis points (approximately 10.0% of the Company's weighted-average
variable rate at June 30, 2000) the net impact would not result in a material
change in the Company's interest expense or the fair value of the Company's debt
obligation.
REGARDING OUTLOOK AND OTHER FORWARD-LOOKING DATA
Portions of the Quarterly 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.
21
<PAGE>
CB RICHARD ELLIS SERVICES, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (filed only with the SEC)
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the second quarter ended June 30,
2000
22
<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 RICHARD ELLIS SERVICES, INC.
Date: August 14, 2000 /s/ Ronald J. Platisha
----------------------------------
Ronald J. Platisha
Executive Vice President,
Financial Operations
23
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
27 Financial Data Schedule (filed only with the SEC)
24
