-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N5NKgfDDlvbR+Na3IhR5EEghITiGDiqbt3VPefCdBaNF4/CvpqT0PR0CoKBRw67P kaBWHNrDG7cqKFr7tq42sw== 0000898430-99-001330.txt : 19990402 0000898430-99-001330.hdr.sgml : 19990402 ACCESSION NUMBER: 0000898430-99-001330 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CB RICHARD ELLIS SERVICES INC CENTRAL INDEX KEY: 0000852203 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 521616016 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12231 FILM NUMBER: 99582842 BUSINESS ADDRESS: STREET 1: 533 S FREMONT AVE CITY: LOS ANGELES STATE: CA ZIP: 90071-1798 BUSINESS PHONE: 2136133123 MAIL ADDRESS: STREET 1: 533 S FREMONT AVE CITY: LOS ANGELES STATE: CA ZIP: 90071-1798 FORMER COMPANY: FORMER CONFORMED NAME: CB COMMERCIAL HOLDINGS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CB ACQUISITION CORP DATE OF NAME CHANGE: 19890731 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-12231 ---------------- CB RICHARD ELLIS SERVICES, INC. (Exact name of Registrant as specified in its charter) Delaware 52-1616016 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
200 North Sepulveda Boulevard El Segundo, California 90245-4380 (Address of principal executive offices) (Zip Code)
(310) 563-8600 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock $.01 par value Securities registered pursuant to Section 12(g) of the Act: None ---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Registrant's Common Stock held by non- affiliates of the Registrant on February 26, 1999 was $240,031,399. Number of shares of Common Stock outstanding at February 26, 1999 was 20,641,401. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its May 18, 1999 Annual Meeting of Stockholders are incorporated by reference in Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I Item 1. Business Company Overview CB Richard Ellis Services, Inc. ("CBRE Services") a holding company that conducts its operations through more than 100 direct and indirect subsidiaries including CB Richard Ellis, Inc. ("CBRE"), L.J. Melody & Company, CB Richard Ellis Investors, L.L.C. ("CBRE Investors") and CB Hillier Parker Limited (CBRE Services and its direct and indirect subsidiaries are herein collectively referred to as the "Company"). The Company is the largest vertically-integrated commercial real estate services company in the world with 1998 revenue of $1.035 billion, approximately 140 principal offices in the U.S. and over 90 offices outside the U.S. including offices in Argentina, Australia, Brazil, Belgium, Canada, France, Germany, Hong Kong, India, Italy, the Netherlands, New Zealand, Peoples Republic of China, Portugal, Singapore, Spain, Switzerland, Taiwan, and the United Kingdom. The Company provides a full range of services to commercial real estate tenants, owners and investors including: (i) brokerage (facilitating sales and leases) ("Brokerage Services"); (ii) transaction management, consulting services and facilities management services to corporate real estate users ("Corporate Services"); (iii) property management and related services ("Asset Services"); and (iv) capital market activities, including mortgage origination and servicing, investment management and advisory services, investment property transactions (acquisitions and sales on behalf of investors), real estate market research and valuation services (collectively "Financial Services"). Industry Trends Over the last ten years, the commercial real estate industry has experienced various structural changes, and since 1994 the industry has generally experienced a broad recovery from the real estate "depression" of the early 1990s. However, in September and October of 1998 a mini-liquidity crisis occurred in the many of the world's capital markets (and particularly the Commercial Mortgage-Backed Securities ("CMBS") market) which has adversely affected investment property transactions on a worldwide basis and slowed down the rate of growth in Brokerage Services and mortgage origination. This mini- liquidity crisis is expected to continue into the first half of 1999 and possibly beyond but it is the Company's belief that it is a temporary phenomenon and not a structural change. Accordingly, management believes that the factors and the resulting trends which have favorably influenced real estate services since 1994 will continue once liquidity returns. The most important of these factors and trends are discussed below. The Company believes that overall, they create a continuing opportunity for the Company to leverage its experience, multi-discipline integrated services, multi-market presence and brand equity to its competitive advantage but recognizes (as the events of September and October of 1998 demonstrated) that their generally positive influence can be adversely affected by changes in global economic conditions. . Healthy Commercial Real Estate Markets. Coincident with the longer term structural shifts in the commercial real estate industry, commercial real estate markets in the United States, Europe and Australia have essentially recovered over the last several years, experiencing increased activity in many product types and geographical market areas. This has been particularly true in California, where the Company has a significant market presence. Relatively strong markets also are prevalent in a number of other major real estate markets where the Company has operations, including Australia, the United Kingdom (although the rate of growth in 1999 is expected to be slower than that of 1998), France and the Netherlands and in the United States, Arizona, Texas, the New England area and the Washington, D.C./Baltimore areas. Office and industrial building occupancy levels have generally been rising, rental rates have been increasing and, correspondingly, property values have been rising. In Asia the trend throughout most of 1998 was declining revenues as the various Asian countries attempted to deal with their significant economic problems. The Company believes that those problems will continue in 1999 and beyond but that in certain countries potential for profit exists on an opportunistic basis. 1 . Changing Composition and Needs of Investors in and Owners of Commercial Real Estate Assets. Investors in and owners of commercial real estate assets have become increasingly institutional (including pension funds, life insurance companies, banks, property companies and in the United States, publicly-held real estate investment trusts ("REIT")). Simultaneously, their investment and management needs have become increasingly multi-market due to the fact that the commercial real estate properties in their portfolios are typically located in numerous geographic locations. With respect to institutions other than REITs, this change in the ownership characteristics and management requirements of institutional real estate investors and owners has fueled the demand for the growth of multi-service, nationally or internationally-oriented real estate service providers. As most REITs are internally managed and to date generally have outsourced only their brokerage service needs, their demand for the Company's other real estate services has been less than that of other institutional investors. The Company believes that the REITs are a potential growth area if Wall Street puts a premium on growth in funds from operations ("FFO") and because of this influence, REITs elect to outsource various property management functions which can be performed more efficiently by broadly based management organizations like the Company. However, to date the Company has seen no indication of REIT outsourcing due to expense containment although the Company currently manages multiple assets for several REITs and frequently originates mortgages for them. . Continuing Corporate Outsourcing Trend. Shareholder pressure for higher performance and return on equity within most public corporations around the globe has heightened corporate management's awareness that corporate real estate assets are a major component of corporate net worth. Simultaneously, with competitive pressures encouraging greater focus on core businesses, companies have emphasized leaner staffing in non- core activities and, as a result, outsourced certain non-core activities to third parties. As a consequence, the demand for multi-discipline, multi-market global professional real estate service firms that provide integrated services capable of supplementing a corporate real estate department has increased significantly. The Company's unique, wholly owned global network provides access to North American, European, South American and Asian companies interested in outsourcing and provides a global network of very high quality to provide service to companies throughout the world in the outsourcing process. As a result of its 1998 acquisitions the Company has the ability to deliver commercial real estate and related services in every major world market. . Changing CMBS Market. The CMBS market has developed to a stage where it is an integral funding source for real estate markets in the United States and is benefiting the industry by enhancing the liquidity level for real estate although that liquidity was materially and adversely affected beginning in the late third quarter of 1998 as a result of a series of worldwide events. As a consequence of those events, the Company's CMBS mortgage originations and investment property transactions in the fourth quarter of 1998 were, and in the first quarter of 1999 are expected to be, reduced. Historically, the majority of third-party financing for commercial real estate assets was provided by banks and insurance companies who generally held the mortgage loans they originated to the maturity date of the mortgage loans. More recently, Wall Street firms and financial institutions have been providing a significant amount of third- party mortgage financing, and have been accessing the public debt markets by issuing CMBS in order to securitize their portfolios and avoid holding mortgage loans for the long term. The Company believes that its overall market presence, extensive available market data and access to real estate transaction deal flow positions its mortgage banking business to benefit substantially from the expansion of the CMBS market. The Company's national geographic coverage and mortgage origination capabilities through its L. J. Melody & Company subsidiary have caused it to become one of the largest suppliers of commercial mortgages to the CMBS market (over $1.9 billion in aggregate originations in 1998 or 27% of the Company's $7 billion in new originations). In addition, the Company expects to service a majority of the mortgage loans that it originates and the profit margin potential for servicing an increasing volume of mortgage loans may be significant for the Company's mortgage banking business. The Company currently services over $11 billion in loans. The Company does not currently securitize loans or take principal risk in its mortgage origination business. The Company 2 believes that the liquidity problems which adversely affected the CMBS markets in late 1998 and early 1999 are temporary, but there can be no assurance that this belief is accurate. Acquisitions The Company does not presently intend to pursue a substantive acquisition strategy in 1999 but it will consider opportunistic acquisitions in its mortgage banking, brokerage and property management businesses. Because of the substantial non-cash goodwill and intangible amortization charges incurred by the Company in connection with acquisitions subject to purchase accounting and because of interest expense associated with acquisition financing, management anticipates that past acquisitions have and future acquisitions may adversely affect net income, especially in the first year or two following the acquisition. This problem is compounded when, as in the case of the 1997 Koll acquisition, the amortization of goodwill must be deducted for financial reporting purposes but is not deductible for actual tax purposes with the result that the provision for taxes for financial reporting purposes is 47-51% when the actual tax rate is 40-45%. In addition, during the first six months following an acquisition, the Company believes there are generally significant one-time costs relating to integrating information technology, accounting and management services and rationalizing personnel levels (which costs the Company intends to take as a single charge at the time of the acquisition to the maximum extent possible). Finally, acquisitions can present serious integration problems both in terms of personality and cultural differences (both of which caused material problems in integrating CB Richard Ellis Investors), and in terms of stress on accounting personnel and other infrastructure systems (which materially slowed the integration of Koll Real Estate Services and to some extent has slowed the financial integration of REI). Management does not intend to pursue acquisitions unless they are accretive to income before interest expense and provision for amortization of goodwill and intangibles and to operating cash flows (excluding the costs of integration). The Company's Businesses Brokerage Services The Company and its predecessors have provided commercial real estate brokerage services since 1906 through the representation of buyers, sellers, landlords and tenants in connection with the sale and lease of office space, industrial buildings, retail properties, multi-family residential properties and unimproved land. In 1998, the Company generated revenues from commercial real estate brokerage services of approximately $546.4 million representing approximately 30,400 completed transactions. In 1998, brokerage facilitated over 5,600 sale transactions with an aggregate estimated total consideration of approximately $23.0 billion and approximately 25,000 lease transactions involving aggregate rents, under the terms of leases facilitated, of approximately $19.0 billion. Brokerage Services comprise the largest source of revenue for the Company and provide a foundation for growing the Company's other disciplines which make up its multi-discipline integrated commercial real estate services. The Company believes that its position in the brokerage services industry provides a competitive advantage for all of its lines of business by enabling them to leverage off brokerage's (i) international network of relationships with owners and users of commercial real estate, (ii) real-time knowledge of completed transactions and real estate market trends, and (iii) brand recognition in the brokerage area. Operations. As of December 31, 1998 the Company employed approximately 1,800 brokerage professionals in offices located in most of the largest Metropolitan Statistical Areas ("MSAs") in the United States and approximately 400 brokerage professionals in the rest of the world. The Company maintains a decentralized approach to brokerage services (other than investment properties which are a part of financial services), bringing significant local knowledge and expertise to each assignment. Each local office draws upon the broad range of support services provided by the Company's other business groups around the world, including an international network of market research, client relationships and transaction referrals which the Company believes provides it with significant economies of scale over local, national and international competitors. While day-to-day operations are decentralized, most accounting and financial functions are, or soon will, be centralized. 3 In order to increase market share in secondary markets in the United States which are not served by its wholly owned offices, the Company implemented a plan to establish "partnerships" with leading local firms in these markets. Through December 31, 1998, the Company had established such partnership-type arrangements in Des Moines, Iowa; Louisville, Kentucky; Buffalo and Rochester, New York; Charleston and Columbia, South Carolina; Memphis, Tennessee; Madison and Milwaukee, Wisconsin; Toledo, Ohio; El Paso, Texas; South Bend and Ft. Wayne, Indiana; and East Lansing and Grand Rapids, Michigan. The Company does not believe that it would be cost efficient to add additional partners to this program. In 1997, the Company contributed its brokerage and property management business in the New England area to a partnership and Whittier Partners, a prominent New England real estate services firm, did likewise. The Company also contributed cash because the assets it contributed were less valuable than the assets contributed by Whittier Partners. The Company and Whittier Partners each own 50% of the partnership. In 1998, the Company entered into a similar 50/50 joint venture in the Pittsburgh area which resulted in the formation of CB Richard Ellis Pittsburgh, L.P. The Company contributed $5.8 million to establish the Pittsburgh joint venture. Compensation. Under a typical brokerage services agreement, the Company is entitled to receive sale or lease commissions. Sale commissions, which are calculated as a percentage of sales price, are generally earned by the Company at the close of escrow. Sale commissions in the United States typically range from approximately 1% to 6% with the rate of commission declining as the price of the property increases. Outside of the United States commissions of 1% to 4% are typical. Lease commissions in the United States are typically calculated either as a percentage of the minimum rent payable during the term of the lease or based upon the square footage of the leased premises and are generally earned by the Company at the commencement of a lease and are not contingent upon the tenant fulfilling the terms of the lease. In cases where a third-party brokerage firm is not involved, lease commissions earned by the Company for a new lease typically range between 2% and 6% of minimum rent payable under the lease depending upon the value of the lease. Outside of the United States, the leasing commission is typically one month's rent or 10% of the first year's rent. For renewal of an existing lease, such fees are generally 50% of a new lease commission. In sales and leases where a third- party broker is involved, the Company must typically share 50% of the commission it would have otherwise received with the third-party broker. In the United States and much of Australia, the Company's brokerage sales professionals will receive 40% to 60% of the Company's share of commissions before costs and expenses. In most other parts of the world, the Company's brokerage professionals receive a salary and a bonus, profit-share or small commission, which in the aggregate approximates 50% of the Company's share of commissions. Corporate Services The Company provides corporate services to major corporations around the world. Corporate services include assisting corporations in developing and executing multiple-market real estate strategies and facilities management services. The Company's objective is to establish long-term relationships with corporations that require continuity in the delivery of high-quality, multi- market management services and strategic consulting services including acquisition and disposition services. Global competition, the focus on quality, "right-sizing" of corporate organizations and changes in management philosophy have all contributed to an increased interest in and reliance on outside third-party real estate service providers. Specifically, through contractual relationships, the Company assists major, multi-market companies in developing and executing real estate strategies as well as addressing specific occupancy and facilities management objectives. Corporate services coordinates the utilization of all the Company's various disciplines to deliver an integrated service to its clients. Essentially, corporate services expands a client's real estate department and supports most of the functions involved in a corporate real estate department. The Company's facilities management unit specializes in the administration, management and maintenance of properties that are occupied by large corporations and institutions, such as corporate headquarters, regional offices, administrative offices and manufacturing and distribution facilities, as well as tenant representation, capital asset disposition, strategic real estate consulting and other ancillary services for corporate clients. As of December 31, 1998, the Company had approximately 110 million square feet under facilities management. While most of the properties for which the Company provides facilities management are located within the United 4 States, the Company is providing such services in Italy and China for a total of approximately 1.5 million square feet and expects its facilities management business outside of the United States to grow rapidly in 1999. However, outside the United States, the facilities management business is not expected to be profitable in 1999. Operations. The Company's facilities management operations in the United States are organized into three geographic regions in the Eastern, Western and Central areas of the United States, with each geographic region comprised of consulting, corporate services and team management professionals who provide corporate service clients with a broad array of financial, real estate, technological and general business skills. Facilities management teams are also in place in London and Singapore. In addition to providing a full range of corporate services in a contractual relationship, the facilities management group will respond to client requests generated by other Company business groups for significant, single-assignment acquisition, disposition and consulting assignments that may lead to long-term relationships. Compensation. A typical corporate services agreement gives the Company the right to execute some or all of the client's future sales and leasing transactions. The commission rate with respect to such transactions frequently reflects a discount for the captive nature and large volume of the business. Under a typical facilities management agreement, the Company is entitled to receive management fees and reimbursement for its costs (such as costs of wages of on-site employees, capital expenditures, field office rent, supplies and utilities) that are directly attributable to management of the facility. Payments for reimbursed expenses are set against those expenses and not included in revenue. Under certain facilities management agreements, the Company may also be entitled to an additional incentive fee which is paid if the Company meets certain performance criteria (such as a reduction in the cost of operating the facility) established in advance between the client and the Company. Term. A typical corporate services agreement includes a stated term of at least one year and normally contains provisions for extension of the agreement. Facilities management agreements are typically multi-year agreements which can be cancelled by the client on three to six months notice, but generally can be cancelled by the Company only for cause. Asset Services The Company provides value-added asset and related services for income- producing properties owned primarily by institutional investors and, as of December 31, 1998, managed approximately 351 million square feet of commercial space in the United States, 44 million square feet in the United Kingdom and 27 million square feet in the rest of the world. Asset services include maintenance, marketing and leasing services for investor-owned properties, including office, industrial, retail and multi- family residential properties. Additionally, the Company provides construction management services, which relate primarily to tenant improvements. The Company works closely with its clients to implement their specific goals and objectives, focusing on the enhancement of property values through maximization of cash flow. The Company markets its services primarily to long- term institutional owners of large commercial real estate assets. An asset services agreement puts the Company in a position to provide other services for the owner including refinancing, appraisal and sales brokerage services. Operations. The Company employs approximately 1,300 individuals in its asset services business in the United States and an additional, approximately 250 individuals in its asset services business outside of the United States. Most asset services are performed by management teams located on-site or in the vicinity of the properties they manage. This provides property owners and tenants with immediate and easily accessible service, enhancing client awareness of manager accountability. All personnel are trained and are encouraged to continue their education through both Company-sponsored and outside training. The Company provides each local office with centralized corporate resources including investments in computer software and hardware. Asset services 5 personnel generally utilize state-of-the-art computer systems for accounting, marketing, and maintenance management. Compensation. Under a typical asset services agreement in the United States, the Company will be entitled to receive management fees and lease commissions. Outside of the United States, the management and leasing functions are generally separate, although the Company may do both. The management fee in most cases is based upon a formula which gives the Company either a certain amount per square foot managed or a specified percentage of the monthly gross rental income collected from tenants occupying the property under management. Where rent is used as the basis for the fee, the fee will increase and decrease as building rents and occupancies increase and decrease. Some of these asset services agreements also include a stated minimum management fee. The Company is generally entitled to reimbursement for costs incurred that are directly attributable to management of the property. Reimbursable costs, which are not included in the Company's revenue, include the wages of on-site employees and, in most cases, the cost of field office rent, furniture, computers, supplies and utilities. The Company pays its asset services professionals a combination of salary and incentive-based bonuses. In the United States, lease commissions, which are paid in addition to the management fee, are similar to those described for brokerage services. In the United States, employees who provide leasing services may be paid either commission or salary and incentive-based bonuses. In the rest of the world, individuals providing leasing services generally receive salary and incentive-based bonuses. Term. A typical asset services agreement contains an evergreen provision which provides that the agreement remains in effect for an indefinite period, but enables the property owner to terminate the agreement upon 30 days prior written notice, which the Company believes to be customary in the commercial real estate industry. Financial Services Mortgage Banking The Company provides its mortgage origination and mortgage loan servicing almost entirely in the United States through L.J. Melody, which was acquired in July 1996 and is based in Houston, Texas. The Company originated approximately $7.0 billion of mortgages in 1998. As part of these origination activities, the Company has special conduit arrangements with affiliates of Merrill Lynch & Co., Citicorp, NationsBank, Heller Financial, J. P. Morgan, GE Capital, RFC Commercial, Lehman Brothers, Bear Stearns and Deutsche Bank Securities which permit it to service the mortgage loans which it originates. Under these arrangements, the Company generally originates mortgages in its name, makes limited representations and warranties based upon representations made to it by the borrower or another party and immediately sells them into a conduit program. The Company may originate mortgages into other conduit programs where it does not have servicing rights. The Company originates and services loans for Federal Home Loan Mortgage Corp. (Freddie Mac) and is a major mortgage originator for insurance companies having originated mortgages in the names of the insurance companies valued at approximately $4.0 billion in 1998. The Company has correspondent arrangements with various life insurance companies and pension funds which entitle it to service the mortgage loans it originates. As of December 31, 1998, the Company serviced mortgage loan portfolios of approximately $11.0 billion. Operations. The Company employs approximately 80 mortgage banking professionals in 24 offices in the United States. The Company has no material mortgage banking operations outside of the United States. The Company's mortgage loan originations take place throughout the United States, with support from L.J. Melody's headquarters in Houston, Texas. The Company's mortgage loan servicing primarily is handled by L.J. Melody in Houston, Texas. Compensation. The Company typically receives origination fees, ranging from 0.5% for large insurance company mortgage loans to 1.0% for most conduit mortgage loans. In addition, the Company can earn special incentive fees from various conduit programs. In 1998, the Company received approximately $1.5 million from such incentives. In situations where the Company services the mortgage loans which it originates, it also receives 6 a servicing fee between .03% and .25%, calculated as a percentage of the outstanding mortgage loan balance. These correspondent agreements generally contain an evergreen provision with respect to servicing which provides that the agreement remains in effect for an indefinite period, but enables the lender to terminate the agreement upon 30 days prior written notice, which the Company believes to be a customary industry termination provision. A majority of the Company's 1998 mortgage loan origination revenue was from agreements which entitled it to both originate and service mortgage loans. The Company also originates mortgage loans on behalf of conduits and insurance companies for whom it does not perform servicing. The Company's client relationships have historically been long term. The Company pays its mortgage banking professionals a combination of salary, commissions and incentive-based bonuses which typically average approximately 50% of the Company's loan origination fees. Investment Properties Since 1992, investment properties has provided sophisticated strategic planning for, and execution of, acquisitions and sales of income-producing properties for its clients. In 1998, the Company completed approximately 2,400 investment property transactions worldwide with an aggregate value of over $17.7 billion. On behalf of property owners seeking to dispose of investment properties, the Company strives to ensure that the owner achieves the maximum value in the minimum amount of time by providing services which include (i) accessing the Company's proprietary databases and other information sources to provide real-time knowledge of available properties, completed comparable transactions, real estate market trends, and active investors in the market, and to assist with valuation and buyer identification, and (ii) designing the appropriate marketing strategy that allows the owner to target probable buyers or buyer categories. On behalf of prospective investors, access to the same sources of information provides the Company's clients with a competitive advantage by enabling the Company's professionals (i) to identify the geographical areas around the world and specific properties in those areas which are most suitable for the investor and (ii) to advise the client in negotiations and due diligence. The investment properties group operates on a coordinated worldwide basis and crosses all geographical boundaries. Operations. As of December 31, 1998, the Company employed approximately 500 investment properties professionals who exclusively handle acquisitions and sales of investment properties. Approximately 300 of the investment property professionals are located in the United States and approximately 200 in the rest of the world. A team of professionals with expertise within a given market and property type is assembled for each investment properties assignment to best accomplish the client's objectives. As necessary, the team may also include professionals from the Company's other disciplines. On larger and more complex assignments, the Company's financial consulting professionals provide sophisticated financial and analytical resources to the client, the marketing team and the investor. These services provide the client with in-depth analyses of transaction specific data as well as real estate market data. Compensation. Under the typical investment properties agreement, the Company is entitled to receive sale commissions, which are calculated as a percentage of sales price and are generally earned by the Company at the close of escrow. In cases where another real estate broker is not involved, sale commissions earned by the Company in the United States typically range from 1% to 6% of the sales price, with the rate of commissions generally declining as the sales price increases. Outside of the United States sales commissions range from 1% to 4% of the sales price. In cases where another firm is involved in the transaction, the Company must typically share up to 50% of the commission it would have otherwise received with the other firm. About half of the Company's investment properties professionals are paid on a commission-only basis and the other half receive salary and incentive compensation; most commission-only professionals are either in the United States or Australia. Investment Management and Investment Products The investment advisory and investment activities of the Company are divided into two basic parts--CBRE Investors and the pension plan advisory services of CB Hillier Parker. Historically, most of CBRE Investors' business has been with pension plans in the form of either commingled funds or separate accounts. Recently, 7 CBRE Investors has begun to develop new products, generally in the form of a real estate operating company, which focus on United States pension plans as core investors but are also designed to be attractive to non pension plan investors. These higher potential yield products generally involve co- investment by the Company and a dedicated group of employees and the Company and such employees generally share in a "promote" (a right to a disproportionate share of profits) if pre-agreed returns are achieved for the investors. To date these new products include a $100 million (pre-leverage) fund to invest in Asia with a major institutional investor, a fund to invest in Japan ($300 million equity target) for which the Company is currently raising funds and a United States fund to make value added investments to be sold within a relatively short time horizon. In most cases, the Company expects to be able to provide ancillary services to these funds such as brokerage and asset management. In most, but not all, of the new funds, contributions are made only as properties are purchased. In the United Kingdom, CB Hillier Parker manages more than $2.6 billion in core real estate mainly for pension plans. In the United States, CBRE Investors manages more than $4.1 billion, mainly for pension plans. Operations. CBRE Investors is organized into three basic divisions, fiduciary services (aimed primarily at the pension investor), new products (which consists of the various new co-investment funds) and research. CBRE Investors currently employs approximately 115 people in Los Angeles, Boston, Tokyo and Singapore. CB Hillier Parker employs approximately 20 people in London with respect to its pension advisory business. Over the past three years, the assets under management by CBRE Investors have declined as various commingled funds have reached their scheduled termination date. During 1998 the Company attracted $750.0 million of new assets for management and distributed $1.16 billion to investors for a net reduction in assets under management of approximately $400.0 million. The Company believes that as a result of its new products its net assets under investment by CBRE Investors will experience positive growth in 1999, although there can be no assurance in this regard. CB Hillier Parker assets under management grew in 1997 and ended the year at $2.6 billion. Compensation. CBRE Investors fees are typically higher for managing commingled and other funds involving pension plan investors than they are for separate accounts and funds with mainly non-pension investors, but all of the fees are within the ranges indicated below. CBRE Investors typically receives an annual asset management fee which is typically 0.5% to 1.2% of the lower of the cost of the assets managed or their fair market value. When debt is managed, the asset management fee is at the lower end of the range. CBRE Investors generally (but not always) receives an acquisition fee when it acquires property or places debt on behalf of a client that is typically 0.5% to 1.0% of funds invested or debt placed (the placement fee for debt is at the low end of this range). In some, but not all cases, CBRE Investors receives an incentive fee when an asset or a fund is sold. Typically, the incentive fee will only be payable after the client has achieved a specified real (adjusted for inflation) rate of return of 8% to 12% and is a percentage of value in excess of that return. With respect to most of the Company's new funds, it also derives fees from ancillary services including brokerage, asset management and mortgage origination and a "promote" if certain thresholds are achieved. Term. The term of CBRE Investors' advisory agreements vary by the form of investment vehicle utilized. In the commingled funds, the term has historically been 10 years with extension and early termination provisions based upon a vote of the investors. Currently the term is three to five years. In the Company's separate account relationships, the agreements are generally one to three years in term, with "at will" termination provisions. In most of the Company's separate accounts, it does not have investment discretion. In the case of new funds in which CBRE Investors makes a co-investment, it generally can be terminated as manager on short notice but retains its equity position (other than any promote). Valuation and Appraisal Services The Company's valuation and appraisal services business delivers sophisticated commercial real estate valuations through a variety of products including market value appraisals, portfolio valuation, discounted cash flow analyses, litigation support, feasibility land use studies and fairness opinions. At December 31, 1998, the Company's appraisal staff had more than 380 professionals with approximately 50% of the staff holding professional designations. The business is operated internationally through 76 offices and its clients are generally 8 corporate and institutional portfolio owners and lenders. In 1998, the Company performed more than 12,900 valuation and appraisal assignments. Approximately 140 of the Company's appraisal professionals are located in the U.S. Real Estate Market Research Real estate market research services are provided by 23 professionals in Boston, Massachusetts employed by CB Richard Ellis/Torto Wheaton Research. Real estate market research services are provided to the Company's other businesses as well as sold to third-party clients and include (i) data collection and interpretation, (ii) econometric forecasting, and (iii) evaluating marketing opportunities and portfolio risk for institutional clients within and across the U.S. commercial real estate markets. The Company's publications and products provide real estate data for more than 50 of the largest MSAs in the United States and are sold on a subscription basis to many of the largest portfolio managers, insurance companies and pension funds in the United States. The National Real Estate Index also compiles proprietary market research for nearly 66 major urban areas nationwide, reporting benchmark market price and rent data for office, light industrial, retail, and apartment properties, and tracking the property portfolios of 135 of the largest real estate market investment trusts. Information Technology The Company's goal in information technology is to provide worldwide capability to input, access and manipulate data for internal accounting and financial reporting, external or client accounting (primarily asset and facilities management and investment advisory services) and as a presentation and analytical business tool (including access to data and information by clients). The Company has adopted a PC/server enterprise platform based upon PeopleSoft and Vantif technology. The worldwide system is generally in place with respect to e-mail, is expected to be in place with respect to internal and external accounting by late 1999 and is expected to be fully in place by mid-2000. As part of its information technology program the Company has adopted mandatory computer hardware and software standards. The Company's information technology group consists of approximately 175 employees, most of whom are located in the United States. The Company has outsourced a significant part of its information technology requirements. Year 2000 Computer Issues See Part II, Item 7--"Management's Discussion and Analysis of Financial Condition and Results of Operation." Competition The market for commercial real estate brokerage and other real estate services provided by the Company is both highly fragmented and highly competitive. Thousands of local commercial real estate brokerage firms and hundreds of regional commercial real estate brokerage firms have offices throughout the world. The Company believes that no more than two other major firms have the ability to compete internationally with the Company's brokerage, investment sales, corporate service or facility management businesses. Most of the Company's competitors in brokerage (and, to a significant extent, asset services) are local or regional firms that are substantially smaller than the Company on an overall basis, but in some cases may be larger locally. L. J. Melody competes (almost entirely in the United States) with a large number of mortgage banking firms and institutional lenders as well as regional and national investment banking firms and insurance companies in providing its mortgage banking services. Appraisal services are provided by other international, national, local and regional appraisal firms and some international, national and regional accounting firms. The Company's asset services business--located principally in the United States and the United Kingdom--compete for the right to manage properties controlled by third parties. The competitor may be the owner of the 9 property (who is trying to decide the efficiency of outsourcing) or another asset services company. Increasing competition in recent years has resulted in having to provide additional services at lower rates, thereby eroding margins. In all of its business disciplines, the Company competes on the basis of the skill and quality of its personnel, the variety of services offered, the breadth of geographic coverage and the quality of its infrastructure, including technology. Employees As of December 31, 1998, the Company had approximately 9,400 employees located in more than 30 countries. All of the Company's U.S. and most of its international sales professionals are parties to contracts with the Company which subject them to the Company's rules and policies during their employment and limit their post-employment activities in terms of soliciting clients or employees of the Company. The Company believes that relations with its employees are good. Item 2. Properties The Company owns a building in downtown Los Angeles, California, which, until early 1999, was the Company's headquarters. The Company is in the process of selling this building. In addition to the Company's headquarters, the Company owns one small office building in Phoenix, Arizona. The Company also leases office space on terms that vary depending on the size and location of the office. The leases expire at various dates through 2007. For those leases that are not renewable, the Company believes there is adequate alternative office space available at acceptable rental rates to meet its needs, although rental rates in some markets may adversely affect the Company's profits in those markets. Item 3. Legal Proceedings In August 1993, a former commissioned sales person of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bergen County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996, a jury returned a verdict against the Company, awarding $6.5 million in general and punitive damages to the plaintiff. Subsequently, the trial court awarded the plaintiff $638,000 in attorneys' fees and costs. Following denial by the trial court of the Company's motions for new trial, reversal of the verdict and reduction of damages, the Company filed an appeal of the verdict and requested a reduction of damages. On March 9, 1999 the appellate court ruled in the Company's favor, reversed the trial court decision and ordered a new trial. Based on available reserves, cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. In December, 1996, GMH Associates, Inc. ("GMH"), filed a lawsuit against Prudential Realty Group ("Prudential") and the Company in Superior Court of Pennsylvania, Franklin County, alleging various contractual and tort claims against Prudential, the seller of a large office complex, and the Company, its agent in the sale, contending that Prudential breached its agreement to sell the property to GMH, breached its duty to negotiate in good faith, conspired with the Company to conceal from GMH that Prudential was negotiating to sell the property to another purchaser and that Prudential and the Company misrepresented that there were no other negotiations for the sale of the property. Following a non-jury trial, the court rendered a decision in favor of GMH and against Prudential and the Company, awarding GMH $20.3 million in compensatory damages, against Prudential and the Company jointly and severally, and $10 million in punitive damages, allocating the punitive damage award $7 million as against Prudential and $3 million as against the Company. Following the denial of motions by Prudential and the Company for a new trial, a judgment was entered on December 3, 1998. Prudential and the Company have filed an appeal of the judgment. The Company believes that it has adequate insurance coverage for the compensatory portion of the judgment and adequate reserves for the punitive portion, as well as potential indemnity claims for the entire judgment. 10 In addition, as a result of the thousands of transactions in which the Company participates and its employment of approximately 9,400 people, it is a party to a number of pending or threatened lawsuits, arising out of or incident to the ordinary course of its business. At any given time, the Company typically is a defendant in 175 to 200 legal proceedings and a plaintiff in 50 to 75 legal proceedings. Management believes that any liability to the Company, net of insurance proceeds, that may result from proceedings to which it is currently a party will not have a material adverse effect on the consolidated financial position or results of operations of the Company. As part of its process of minimizing, to the extent possible, potential litigation, the Company requires its sales professionals in the United States to agree to contribute each month toward a "Reserve Account" to be used whenever a claim of professional liability is asserted. In addition, each sales professional contractually agrees to be responsible for a portion of any amount paid to defend or settle a claim against that professional or for any resulting judgment. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters (1) The Company's Common Stock commenced trading on the New York Stock Exchange on November 7, 1997 under the symbol "CBG." Prior to that, the Company's Common Stock traded on the Nasdaq Stock Market--National Market System ("NASDAQ--NMS") under the symbol "CBCG" from November 26, 1996 through November 6, 1997. Prior to that period, there was no established public trading market for the Company's Common Stock. The following table sets forth, for the periods indicated, the high and low sales price per share of the Common Stock on the NYSE, and the high and low bid prices for the Common Stock on the NASDAQ--NMS.
Year Ended December 31, 1997 High Low ---------------------------- -------- ------ First Quarter................................................ 27 3/8 18 1/4 Second Quarter............................................... 30 3/4 20 3/4 Third Quarter................................................ 33 3/4 28 3/4 Fourth Quarter (through November 6, 1997).................... 39 1/2 32 1/4 Fourth Quarter (from November 7, 1997)....................... 38 28 1/2 Year Ended December 31, 1998 ---------------------------- First Quarter................................................ 40 27 Second Quarter............................................... 40 3/8 32 Third Quarter................................................ 35 13/16 19 1/4 Fourth Quarter............................................... 25 12 5/8
(2) As of February 28, 1999, the Company had 852 record holders of its Common Stock. (3) Since its incorporation in March 1989 the Company has not declared any cash dividends on its Common Stock. The Company's existing credit agreement restricts its ability to pay dividends on Common Stock. (4) In June 1998, the Company sold 25,000 shares of Common Stock to an executive officer of the Company under the Company's 1996 Equity Incentive Plan. The sale was made by private placement in reliance on the exemption from registration provisions provided for in Section 4(2) of the Securities Act of 1933, as amended. 12 Item 6. Selected Financial Data CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL INFORMATION: (Dollars in thousands except per share data)
Year Ended December 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenue................. $1,034,503 $ 730,224 $ 583,068 $ 468,460 $ 428,988 Costs and Expenses: Commissions, fees and other incentives..... 447,333 364,403 292,266 239,018 225,085 Operating, administrative and other................ 459,924 275,749 228,799 187,968 170,234 Merger-related and other nonrecurring charges.............. 16,585 12,924 - - - Depreciation and amortization......... 32,185 18,060 13,574 11,631 8,091 ---------- ---------- ---------- ---------- ---------- Operating income........ 78,476 59,088 48,429 29,843 25,578 Interest income......... 3,054 2,598 1,503 1,674 1,109 Interest expense........ 31,047 15,780 24,123 23,267 17,362 ---------- ---------- ---------- ---------- ---------- Income before provision (benefit) for income tax.................... 50,483 45,906 25,809 8,250 9,325 Provision for income tax.................... 25,926 20,558 11,160 841 152 Reduction of valuation allowances(1).......... - - (55,900) - - ---------- ---------- ---------- ---------- ---------- Net provision (benefit) for income tax......... 25,926 20,558 (44,740) 841 152 ---------- ---------- ---------- ---------- ---------- Income before extraordinary items.... 24,557 25,348 70,549 7,409 9,173 Extraordinary items, net.................... - 951 - - - ---------- ---------- ---------- ---------- ---------- Net income.............. $ 24,557 $ 24,397 $ 70,549 $ 7,409 $ 9,173 ========== ========== ========== ========== ========== Net income (loss) applicable to common stockholders(2)........ $ (7,716) $ 20,397 $ 69,549 $ 7,409 $ 9,173 Basic earnings (loss) per share(2)........... $ (0.38) $ 1.34 $ 5.05 $ 0.55 $ 0.69 Number of shares used in computing basic earnings (loss) per share(2)............... 20,136,117 15,237,914 13,783,882 13,499,862 13,264,405 Diluted earnings (loss) per share(2)........... $ (0.38) $ 1.28 $ 4.99 $ 0.55 $ 0.69 Number of shares used in computing diluted earnings (loss) per share(2)............... 20,136,117 15,996,929 14,126,636 13,540,541 13,305,118 OTHER DATA: EBITDA(3)............... $ 127,246 $ 90,072 $ 62,003 $ 41,474 $ 33,669 Net cash provided by operating activities... $ 76,614 $ 80,835 $ 65,694 $ 30,632 $ 31,418 Net cash used in investing activities... $ (223,520) $ (18,018) $ (10,906) $ (24,888) $ (3,865) Net cash provided by (used in) financing activities............. $ 119,438 $ (64,964) $ (28,505) $ (11,469) $ (4,923) As of December 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Cash and cash equivalents............ $ 19,551 $ 47,181 $ 49,328 $ 23,045 $ 28,770 Total assets............ 856,892 500,100 278,944 190,954 150,100 Total long-term debt.... 373,691 146,273 148,529 250,142 233,571 Total liabilities....... 660,175 334,657 280,364 345,642 314,648 Minority interest....... 5,875 7,672 95 - - Total stockholders' equity (deficit)....... 190,842 157,771 (1,515) (154,688) (164,548)
- -------- (1) See Note 10 of Notes to Consolidated Financial Statements. (2) See Per Share Information in Note 11 of Notes to Consolidated Financial Statements. (3) EBITDA effectively removes the impact of certain non-cash and nonrecurring charges on income such as depreciation and the amortization of intangible assets relating to acquisitions, merger-related and other nonrecurring charges, extraordinary items, and income taxes. Management believes that the presentation of EBITDA will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash (subject to the payment of interest and income taxes) generated that can be used by the Company to service its debt and other required or discretionary purposes. Net cash that will be available to the Company for discretionary purposes represents remaining cash, after debt service and other cash requirements, such as capital expenditures, are deducted from EBITDA. EBITDA should not be considered as an alternative to (i) operating income determined in accordance with GAAP or (ii) operating cash flow determined in accordance with GAAP. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction CB Richard Ellis Services, Inc. through its direct and indirect subsidiaries (collectively the "Company") provides real estate services through approximately 230 offices worldwide including but not limited to the United States, Argentina, Australia, Brazil, Belgium, Canada, France, Germany, Hong Kong, India, Italy, the Netherlands, New Zealand, People's Republic of China, Portugal, Singapore, Spain, Switzerland, Taiwan, and United Kingdom. Over the course of the last five years the Company, in recognition of a rapidly changing structural and economic environment, has changed from being almost exclusively a traditional U.S. real estate broker to being a diversified global real estate services firm. Its outsourcing, transaction management, advisory services and facilities management services to corporate real estate user services (referred to as "Corporate Services"), property management and related services ("Asset Services") and capital market activities, including mortgage banking, brokerage and servicing, investment management and advisory services, investment property transactions (including acquisitions and sales on behalf of investors), real estate market research and valuation and appraisal services (collectively "Financial Services") are either the largest or one of the largest such businesses in both the world and the United States and in the aggregate accounted for more than $488.1 million in 1998 revenue. The Company's core brokerage business, commercial property sales and leasing ("Brokerage Services") accounted for approximately $546.4 million in 1998 revenue and is one of the largest such businesses in the United States. As part of its strategic emphasis in developing a worldwide business, the Company has, since the beginning of 1995, completed multiple acquisitions, an $87.0 million public offering of common stock and a $175.0 million offering of senior subordinated notes. The Company is continually assessing acquisition opportunities as part of its growth strategy. Because of the substantial non- cash goodwill and intangible amortization charges incurred by the Company in connection with acquisitions subject to purchase accounting and because of interest expense associated with acquisition financing, past acquisitions have and future acquisitions may adversely affect net income. In addition, during the first six months following an acquisition, the Company believes there are generally significant one-time costs relating to integrating information technology, accounting and management services and rationalizing personnel levels (which the Company intends to reflect as a statement of operations charge or as part of the purchase price at the time of the acquisition as appropriate). Management's strategy is to pursue acquisitions that are expected to be accretive to income before interest expense and provision for amortization of goodwill and intangibles, if any, and to operating cash flows (excluding the costs of integration). In 1998, acquisitions accounted for approximately $157.0 million of revenues. Revenue from Brokerage Services and the investment properties component of Financial Services, which constitutes a substantial majority of the Company's revenue, is largely transactional in nature and subject to economic cycles. However, the Company's significant size, geographic coverage, number of transactions and large continuing client base tend to minimize the impact of economic cycles on annual revenue and create what the Company believes is equivalent to a recurring stream of revenue. Between 50.0% and 55.0% of the costs and expenses associated with Brokerage Services and the investment properties component of Financial Services are directly correlated to revenue while approximately 25.0% of the costs and expenses of Corporate Services, Asset Services and Financial Services, excluding investment properties, are directly correlated to revenue. A significant portion of the Company's revenue is seasonal. Historically, this seasonality has caused the Company's revenue, operating income and net income to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. In addition, the Company's operations are directly affected by actual and perceived trends in various national and economic conditions, including interest rates, the availability of credit to finance commercial real estate transactions and the impact of tax laws. To date, the Company does not believe that general inflation has had a material impact upon its operations. Revenues, commissions and other variable costs related to revenues are primarily affected by real estate market supply and demand rather than general inflation. 14 Results of Operations The following table sets forth items derived from the Company's Consolidated Statements of Operations for the years ended December 31, 1998, 1997, and 1996, presented in dollars and as a percentage of revenue.
Year Ended December 31, ------------------------------------------------- 1998 1997 1996 ---------------- -------------- --------------- (Dollars in thousands) Revenue.................... $1,034,503 100.0% $730,224 100.0% $583,068 100.0% Costs and expenses: Commissions, fees and other incentives........ 447,333 43.2 364,403 49.9 292,266 50.1 Operating, administrative and other............... 459,924 44.5 275,749 37.8 228,799 39.3 Merger-related and other nonrecurring charges.... 16,585 1.6 12,924 1.8 - - Depreciation and amortization............ 32,185 3.1 18,060 2.4 13,574 2.3 ---------- ----- -------- ----- -------- ----- Operating income........... 78,476 7.6 59,088 8.1 48,429 8.3 Interest income............ 3,054 0.3 2,598 0.3 1,503 0.2 Interest expense........... 31,047 3.0 15,780 2.2 24,123 4.1 ---------- ----- -------- ----- -------- ----- Income before provision (benefit) for income tax.. 50,483 4.9 45,906 6.2 25,809 4.4 Provision for income tax... 25,926 2.5 20,558 2.8 11,160 1.9 Reduction of valuation allowances................ - - - - (55,900) (9.6) ---------- ----- -------- ----- -------- ----- Net provision (benefit) for income tax................ 25,926 2.5 20,558 2.8 (44,740) (7.7) ---------- ----- -------- ----- -------- ----- Income (loss) before extraordinary items....... 24,557 2.4 25,348 3.4 70,549 12.1 Extraordinary items, net... - - 951 0.1 - - ---------- ----- -------- ----- -------- ----- Net income................. $ 24,557 2.4% $ 24,397 3.3% $ 70,549 12.1% ========== ===== ======== ===== ======== ===== EBITDA..................... $ 127,246 12.3% $ 90,072 12.3% $ 62,003 10.6% ========== ===== ======== ===== ======== =====
Since 1992, the Company's results have benefitted from its ability to take advantage of a significant and ongoing recovery in U.S. commercial real estate markets and the generally rising occupancy, rental levels and property values, as well as from significant expansion into international markets. Since brokerage fees are typically based upon a percentage of transaction value, and property management fees are typically based upon a percentage of total rent collections, recent occupancy and rental rate increases at the property level have generated an increase in brokerage and property management fees to the Company. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 The Company reported consolidated net income of $24.6 million for the year ended December 31, 1998, on revenues of $1.035 billion. However, the $32.3 million deemed dividend resulting from the accounting treatment of the preferred stock repurchase resulted in the net loss applicable to common stockholders of $7.7 million, or $0.38 diluted loss per share for the year ended December 31, 1998. Excluding the deemed dividend and merger-related and other nonrecurring charges of $16.6 million, and related tax effect, diluted earnings would have been $1.68 per share. Revenues on a consolidated basis were $1.035 billion, an increase of $304.3 million or 41.7% for the year ended December 31, 1998, compared to the year ended December 31, 1997. The overall increase reflected a continued improvement in the commercial real estate markets across the U.S., a full contribution from Koll Real Estate Services ("Koll") and a partial contribution from REI Limited ("REI") and Hillier Parker ("HP") and various other acquisitions. This improvement reflected both the Company's position and increasing consumer confidence in the U.S. and European economies and, in particular, real estate assets and improving real estate market liquidity. Additionally, the Company continued to benefit from its global market presence by leveraging 15 the ability to deliver comprehensive real estate services into new businesses. However, revenues for the fourth quarter and 1998 as a whole were adversely affected by the liquidity problems in the global capital markets in general and the Commercial Mortgage-Backed Securities ("CMBS") market in particular which began in September of 1998 and have continued through the first quarter of 1999. Commissions, fees and other incentives on a consolidated basis were $447.3 million, an increase of $82.9 million or 22.8% for the year ended December 31, 1998, compared to the year ended December 31, 1997. The increase in these costs is attributable to the increase in revenue since most of the Company's sales professionals are compensated based on revenue. As a percentage of revenue, commissions fees and other incentives were 43.2% for the year ended December 31, 1998, compared to 49.9% for the year ended December 31, 1997. The decrease as a percentage of revenue is primarily due to the acquisition of Koll, which has a higher percentage of base management fee revenue which has no related commission expense and REI and HP which generally do not operate under a commission-based program. Operating, administrative and other on a consolidated basis was $459.9 million, an increase of $184.2 million or 66.8% for the year ended December 31, 1998, compared to the year ended December 31, 1997. As a percentage of revenue, operating, administrative and other were 44.5% for the year ended December 31, 1998 compared to 37.8% for the year ended December 31, 1997. The increase in amount and percentage is primarily due to the building of an infrastructure in anticipation of improved market environment which was not fully realized in 1998 and the acquisition of Koll, REI and HP which have relatively higher fixed operating expenses. Due to the integration of Koll and the partial integration of REI and HP, operating, administrative and other as a percentage of revenue has increased, while commissions, fees and other incentives as a percentage of revenue has decreased. Merger-related and other nonrecurring charges were $16.6 million for the year ended December 31, 1998. These charges represent $3.8 million of costs associated with the integration of REI's operations and systems into the Company's, $3.8 million related to name change costs, and $9.0 million related to the write-down in the carrying value of the Company's headquarters building to its estimated fair market value. The Company intends to sell and relocate from its historic headquarters building. Consolidated interest income was $3.1 million, an increase of $0.5 million or 17.6% for the year ended December 31, 1998, as compared to the year ended December 31, 1997. Consolidated interest expense was $31.0 million, an increase of $15.3 million or 96.7% for the year ended December 31, 1998, as compared to the year ended December 31, 1997. The increase resulted from the issuance of senior subordinated notes and increased revolving credit facility borrowings which were used for the repurchase of the Company's preferred stock and to acquire businesses. Provision for income tax on a consolidated basis was $25.9 million, an increase of $5.4 million or 26.1% for the year ended December 31, 1998, as compared to the year ended December 31, 1997. The increase in tax expense is attributable to increased earnings which include international earnings from various foreign jurisdictions. In early 1998 the Company repurchased its outstanding preferred stock which triggered a limitation on the annual amount of net operating loss ("NOL") it can use to offset future U.S. taxable income. This limitation does not affect the way taxes are reported for financial reporting purposes, but it will affect the timing of the actual amount of taxes paid on an annual basis. The increase in the effective tax rate is primarily the result of additional nonamortizable goodwill from recent acquisitions and losses in certain foreign jurisdictions for which no tax benefit is received. EBITDA, excluding merger-related and other nonrecurring costs was $127.2 million for the year ended December 31, 1998, as compared to $90.1 million for the year ended December 31, 1997. EBITDA effectively removes the impact of certain non-cash and nonrecurring charges on income such as depreciation and the amortization of intangible assets relating to acquisitions, merger-related and other nonrecurring charges, extraordinary items, and income taxes. Management believes that the presentation of EBITDA will enhance a 16 reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash (subject to the payment of interest and income taxes) generated that can be used by the Company to service its debt and other required or discretionary purposes. Net cash that will be available to the Company for discretionary purposes that represents remaining cash after debt service and other cash requirements, such as capital expenditures, are deducted from EBITDA. EBITDA should not be considered as an alternative to (i) operating income determined in accordance with GAAP or (ii) operating cash flow determined in accordance with GAAP. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 The Company reported consolidated net income of $24.4 million ($1.28 diluted earnings per share) in 1997, on revenues of $730.2 million. Reflected in the consolidated net income are merger-related and other nonrecurring charges of $12.9 million, $2.1 million in amortization related to the write-off of Langdon Rieder acquisition goodwill and an extraordinary loss of $1.0 million net of a tax benefit of $0.7 million resulting from debt extinguishment. Excluding these charges and their related tax impact, the Company's consolidated net income would have been $33.6 million (or 4.6% of revenue) and diluted earnings would have been $1.83 per share. Revenues on a consolidated basis were $730.2 million, an increase of $147.2 million or 25.2% for the year ended December 31, 1997, compared to the year ended December 31, 1996. The overall increase reflected a continued improvement in the commercial real estate markets across the country, the acquisition of Koll at the end of August 1997 and a full year of revenue from L.J. Melody & Company ("L.J. Melody") which was acquired in July of 1996. This improvement reflected both the Company's position and increasing confidence in the national economy and, in particular, real estate assets and improving real estate market liquidity. Commissions, fees and other incentives on a consolidated basis were $364.4 million, an increase of $72.1 million or 24.7% for the year ended December 31, 1997, compared to the year ended December 31, 1996. The increase in these costs is attributable both to the increase in revenue since most of the Company's sales professionals are compensated based on revenue and to an increasing number of sales personnel becoming entitled to commissions at a rate above 50.0%. As a percentage of revenue, commissions fees and other incentives were 49.9% and 50.1% in 1997 and 1996, respectively. Operating, administrative and other on a consolidated basis was $275.7 million, an increase of $47.0 million or 20.5% for the year ended December 31, 1997, compared to the year ended December 31, 1996. This is consistent with increased operating activity, and reflects a decrease in operating, administrative and other as a percentage of revenue from 39.3% to 37.8%. Merger-related and other nonrecurring charges were $12.9 million for the year ended December 31, 1997. These charges represent $8.8 million of accrued merger costs, $2.4 million of merger-related incentive payments to certain sellers of Westmark Realty Advisors L.L.C. ("Westmark") and $1.7 million related to an accelerated contingent note payment. Consolidated interest income was $2.6 million, an increase of $1.1 million or 72.9% for the year ended December 31, 1997, as compared to the year ended December 31, 1996, which directly relates to increased cash balances. Consolidated interest expense was $15.8 million, a decrease of $8.3 million or 34.6% for the year ended December 31, 1997, as compared to the year ended December 31, 1996. The decrease is the result of the payment of a portion of the senior debt with the net proceeds from the Company's initial public offering in late 1996, a reduction in interest rates due to debt refinancing in late August 1997, and other payments during 1997. Net provision for income tax on a consolidated basis in 1997 was $20.6 million, compared to a $44.7 million benefit for 1996. The 1997 provision is the result of positive pre-tax income and the use of the full 17 effective tax rate, whereas the benefit in 1996 resulted primarily from the recognition of a portion of the Company's NOL carryforwards and other deferred tax assets by reversing the related valuation allowance. See Note 10 to the Company's consolidated financial statements for discussion of the Company's deferred taxes and related valuation allowances. Extraordinary items of $1.0 million relate to the write-off of deferred loan costs due to extinguishment of certain senior and senior subordinated debt. The amount is net of a tax benefit of $0.7 million. There were no corresponding charges incurred in 1996. EBITDA was $90.1 million for the year ended December 31, 1997 as compared to $62.0 million for the year ended December 31, 1996. EBITDA effectively removes the impact of certain non-cash and nonrecurring charges on income such as depreciation and the amortization of intangible assets relating to acquisitions, merger-related and other nonrecurring charges, extraordinary items, and income taxes. 18 Segment Operations The Company provides integrated real estate services through four global business units. The four units are Brokerage Services, Corporate Services, Asset Services and Financial Services. The factors for determining the reportable segments were based on the type of service and client. Each business segment requires and is responsible for executing a unique marketing and business strategy. Brokerage Services consists of commercial property sales and leasing services. Corporate Services consists of outsourcing, transaction management, advisory services and facilities management. Asset Services consists of property management and related services. Financial Services consists of investment property services (acquisitions and sales on behalf of investors), mortgage loan origination and servicing through L.J. Melody, investment management and advisory services through CB Richard Ellis Investors L.L.C. ("CBRE Investors"), capital markets activities, valuation and appraisal services and real estate market research. The following tables summarize the revenue, cost and expenses, and operating income by operating segment for the years ended December 31, 1998, 1997 and 1996.
Year Ended December 31, ---------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (Dollars in thousands) Brokerage Services Revenue....................... $546,361 100.0% $423,485 100.0% $345,906 100.0% Costs and expenses: Commissions, fees and other incentives................. 284,935 52.2 237,697 56.1 191,830 55.5 Operating, administrative and other.................. 188,698 34.5 133,661 31.6 122,845 35.5 Depreciation and amortization............... 10,820 2.0 8,200 1.9 7,092 2.0 -------- ----- -------- ----- -------- ----- Operating income.............. $ 61,908 11.3% $ 43,927 10.4% $ 24,139 7.0% ======== ===== ======== ===== ======== ===== EBITDA........................ $ 72,728 13.3% $ 52,127 12.3% $ 31,231 9.0% ======== ===== ======== ===== ======== ===== Corporate Services Revenue....................... $ 78,671 100.0% $ 37,608 100.0% $ 25,564 100.0% Costs and expenses: Commissions, fees and other incentives................. 27,921 35.5 17,596 46.8 14,286 55.9 Operating, administrative and other.................. 46,800 59.5 17,526 46.6 10,700 41.9 Depreciation and amortization............... 2,491 3.2 898 2.4 243 0.9 -------- ----- -------- ----- -------- ----- Operating income.............. $ 1,459 1.8% $ 1,588 4.2% $ 335 1.3% ======== ===== ======== ===== ======== ===== EBITDA........................ $ 3,950 5.0% $ 2,486 6.6% $ 578 2.3% ======== ===== ======== ===== ======== ===== Asset Services Revenue....................... $126,322 100.0% $ 67,442 100.0% $ 44,783 100.0% Costs and expenses: Commissions, fees and other incentives................. 27,046 21.4 21,852 32.5 17,416 38.9 Operating, administrative and other.................. 84,175 66.6 39,003 57.8 21,518 48.0 Depreciation and amortization............... 5,870 4.6 2,040 3.0 700 1.6 -------- ----- -------- ----- -------- ----- Operating income.............. $ 9,231 7.4% $ 4,547 6.7% $ 5,149 11.5% ======== ===== ======== ===== ======== ===== EBITDA........................ $ 15,101 12.0% $ 6,587 9.8% $ 5,849 13.1% ======== ===== ======== ===== ======== ===== Financial Services Revenue....................... $283,149 100.0% $201,689 100.0% $166,815 100.0% Costs and expenses: Commissions, fees and other incentives................. 107,431 37.9 87,258 43.2 68,734 41.2 Operating, administrative and other.................. 140,251 49.5 85,559 42.5 73,736 44.2 Depreciation and amortization............... 13,004 4.6 6,922 3.4 5,539 3.3 -------- ----- -------- ----- -------- ----- Operating income.............. $ 22,463 8.0% $ 21,950 10.9% $ 18,806 11.3% ======== ===== ======== ===== ======== ===== EBITDA........................ $ 35,467 12.6% $ 28,872 14.3% $ 24,345 14.6% ======== ===== ======== ===== ======== ===== Merger-related and other nonrecurring charges......... $ 16,585 $ 12,924 $ - ======== ======== ======== Total operating income........ $ 78,476 $ 59,088 $ 48,429 ======== ======== ======== Total EBITDA.................. $127,246 $ 90,072 $ 62,003 ======== ======== ========
19 The following discussion of each of the Company's four operating segments should be read in conjunction with Note 14 to the Consolidated Financial Statements. Segment operating income excludes interest income, interest expense, merger-related and other nonrecurring charges, provision for income taxes and extraordinary items. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Brokerage Services Revenue increased by $122.9 million or 29.0% for the year ended December 31, 1998, compared to the year ended December 31, 1997, due to the continued improvement of the real estate market and the partial contribution from REI and HP. The strong market resulted in higher property values, higher rental rates and increased activity, which translated to increases in both the total number and size of brokerage sales and lease transactions closed for the year ended December 31, 1998, as compared to the year ended December 31, 1997. Commissions, fees and other incentives increased by $47.2 million or 19.9% for the year ended December 31, 1998, compared to the year ended December 31, 1997, primarily due to increased revenues, which resulted in higher commission eligibility levels and, thus, higher commissions. As a percentage of revenue, commissions, fees and other incentives were 52.2% for the year ended December 31, 1998 compared to 56.1% for the year ended December 31, 1997. The decrease in commissions, fees and other incentives as a percentage of revenue is primarily due to the integration of REI and HP which generally do not operate under a commission-based program. Operating, administrative, and other increased by $55.0 million or 41.2% for the year ended December 31, 1998, compared to the year ended December 31, 1997. The increase in the amount is primarily a result of additional personnel requirements and business promotion and office operations expenses, which contributed to the increase in revenue, the integration of REI and incentive compensation based on increased operating results. Depreciation and amortization increased by $2.6 million or 32.0% for the year ended December 31, 1998, as compared to the year ended December 31, 1997, primarily as a result of additional investments in hardware and software to support the increase in new business and the acquisitions of REI and HP, offset in part by the write-off of Langdon Rieder acquisition goodwill of $2.1 million in 1997. Corporate Services Revenue increased by $41.1 million or 109.2% for the year ended December 31, 1998, compared to the year ended December 31, 1997, primarily due to the contribution from Koll and REI as well as the wider acceptance of real estate management outsourcing. Commissions, fees and other incentives increased by $10.3 million or 58.7% for the year ended December 31, 1998 compared to the year ended December 31, 1997, but decreased as a percentage of revenue from 46.8% to 35.5% primarily because the base contract management fee revenues, which increased as a result of the acquisition of Koll, do not have corresponding commission expenses. Operating, administrative, and other increased $29.3 million or 167.0% for the year ended December 31, 1998, compared to the year ended December 31, 1997, primarily related to the acquisition of Koll, which has higher fixed operating expenses, additional personnel requirements, business promotion expenses and the investment made in infrastructure to expand corporate services business from the combination with REI and HP. Depreciation and amortization increased by $1.6 million or 177.4% for the year ended December 31, 1998, as compared to the year ended December 31, 1997, primarily related to the acquisitions of Koll, REI and HP. Asset Services Revenue increased by $58.9 million or 87.3% for the year ended December 31, 1998, compared to the year ended December 31, 1997 primarily due to management's ability to achieve greater efficiency in operations and leverage the revenue base of acquired companies. Commissions, fees and other incentives increased by $5.2 million or 23.8% for the year ended December 31, 1998, compared to the year ended December 31, 1997, but decreased as a percentage of revenue from 32.5% to 21.4% primarily because the base contract management fee revenues, which increased as a result of the acquisition of Koll, do not have corresponding commission expenses. Operating, administrative, and other increased $45.2 million or 115.8% for the year ended 20 December 31, 1998, compared to the year ended December 31, 1997. The increase in amount is primarily due to the full integration of Koll and the partial integration of REI and HP. Depreciation and amortization increased by $3.8 million or 187.7% for the year ended December 31, 1998 compared to the year ended December 31, 1997, primarily related to the acquisitions of Koll and REI. Financial Services Revenue increased by $81.5 million or 40.4% for the year ended December 31, 1998, compared to the year ended December 31, 1997. The increase in revenue is primarily due to the full contribution of Koll, partial contributions of REI and HP, and growth at the mortgage banking and valuations units offset by declines at the investment properties and investment management units. Commissions, fees and other incentives increased by $20.2 million or 23.1% for the year ended December 31, 1998, compared to the year ended December 31, 1997. The increase is primarily a result of the revenue increase and the resulting higher commission eligibility levels in investment properties, mortgage banking and valuation and appraisal services. Operating, administrative, and other increased by $54.7 million or 63.9% for the year ended December 31, 1998, compared to the year ended December 31, 1997, primarily as a result of business promotion expenses and additional personnel requirements, which contributed to the increase in revenue, and the full integration of Koll and the partial integration of REI and HP. Depreciation and amortization increased by $6.1 million or 87.9% for the year ended December 31, 1998, as compared to the year ended December 31, 1997, primarily related to the additional investment in information systems hardware and software to support the increase in new business and the acquisitions of Koll, REI and HP. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Brokerage Services Revenue increased by $77.6 million or 22.4% for the year ended December 31, 1997, compared to the year ended December 31, 1996, due to the continued improvement of the real estate market. The strong market resulted in higher property values, higher rental rates and increased activity, which translated to increases in both the total number and size of brokerage sales and lease transactions closed during 1997 as compared to 1996. Commissions, fees and other incentives increased by $45.9 million or 23.9% for the year ended December 31, 1997 compared to the year ended December 31, 1996, primarily due to increased revenues, which resulted in higher commission eligibility levels and, thus, higher commissions. The increase in commissions, fees and other incentives was greater than the increase in revenues as a result of a tiered commission program whereby after certain eligibility criteria is achieved, producers receive an additional premium paid annually. Operating, administrative, and other increased by $10.8 million or 8.8% for the year ended December 31, 1997 compared to the year ended December 31, 1996, but decreased as a percentage of revenue from 35.5% to 31.6%. The increase in the amount is primarily a result of additional personnel requirements and business promotional expenses, which contributed to the increase in revenue and incentive compensation based on increased operating results. Depreciation and amortization increased by $1.1 million or 15.6% for the year ended December 31, 1997, as compared to the year ended December 31, 1996, primarily due to the write-off of Langdon Rieder acquisition goodwill of $2.1 million, partially offset by reduced depreciation due to an increase in fully depreciated assets. Corporate Services Revenue increased by $12.0 million or 47.1% for the year ended December 31, 1997, compared to the year ended December 31, 1996, primarily due to the Koll acquisition and an increase in the total number and size of corporate services sales and lease transactions closed during 1997 compared to 1996. Commissions, fees and other incentives increased by $3.3 million or 23.2% for the year ended December 31, 1997 compared to the year ended December 31, 1996, but decreased as a percentage of revenue from 55.9% to 46.8% primarily because the base contract management fee revenues, which increased as a result of the Koll acquisition, do not have corresponding commission expenses. Operating, administrative, and other increased $6.8 million or 63.8% for 21 the year ended December 31, 1997, compared to the year ended December 31, 1996, primarily related to the Koll acquisition and to additional personnel requirements and business promotional expenses which contributed to the increase in revenue. Depreciation and amortization increased by $0.7 million or 269.5% for the year ended December 31, 1997, as compared to the year ended December 31, 1996, primarily related to the Koll acquisition. Asset Services Revenue increased by $22.7 million or 50.6% for the year ended December 31, 1997, compared to the year ended December 31, 1996. Commissions, fees and other incentives increased by $4.4 million or 25.5% for the year ended December 31, 1997 compared to the year ended December 31, 1996. Operating, administrative, and other increased $17.5 million or 81.3% for the year ended December 31, 1997 compared to the year ended December 31, 1996. Depreciation and amortization increased by $1.3 million or 191.4% for the year ended December 31, 1997 compared to the year ended December 31, 1996. Each of these increases in Asset Services were primarily related to the Koll acquisition. Financial Services Revenue increased by $34.9 million or 20.9% for the year ended December 31, 1997 compared to the year ended December 31, 1996. The increase in revenue is primarily due to an increase in the total number and size of investment properties and mortgage banking transactions closed during 1997 compared to 1996, a full year of mortgage banking revenue related to the L.J. Melody acquisition compared to six months for the same period last year and an increase in valuation and appraisal services revenue related to heightened real estate market liquidity, partially offset by a decrease in investment advisory services. Commissions, fees and other incentives increased by $18.5 million or 27.0% for the year ended December 31, 1997 compared to the year ended December 31, 1996. The increase is primarily a result of the revenue increase and the resulting higher commission eligibility levels in investment properties, mortgage banking and valuation and appraisal services, increased mortgage banking commissions related to the L.J. Melody acquisition which includes a full year of activity compared to six months for same period last year, and mortgage banking base salary costs. Operating, administrative, and other increased by $11.8 million or 16.0% for the year ended December 31, 1997 compared to the year ended December 31, 1996, primarily as a result of business promotional expenses and additional personnel requirements which contributed to the increase in revenue, and the L.J. Melody and Koll acquisitions. Depreciation and amortization increased by $1.4 million or 25.0% for the year ended December 31, 1997 as compared to the year ended December 31, 1996, primarily related to the L.J. Melody and Koll acquisitions. Liquidity and Capital Resources The Company has historically financed its operations and non-acquisition related capital expenditures primarily with internally generated funds and borrowings under a revolving credit facility. In order to fund the January 1998 preferred stock repurchase, various business acquisitions and other working capital requirements, the Company borrowed approximately $172.8 million net of discount through the issuance of senior subordinated notes and had additional net borrowings of $47.0 million under the revolving credit facility, during the year ended December 31, 1998. As a result, the Company's total indebtedness at December 31, 1998 was $373.7 million, excluding current maturities. The Company's EBITDA, excluding merger-related and other nonrecurring costs, was $127.2 million and $90.1 million for the year ended December 31, 1998 and 1997, respectively. Net cash provided by operating activities was $76.6 million in 1998 compared to $80.8 million in 1997. The change is primarily due to an increase in international receivables arising from acquisitions in 1998 and changes in components of operating assets and liabilities. Net cash provided by operating activities was $80.8 million in 1997, compared to $65.7 million in 1996. The increase resulted primarily from an improvement in operating income, before non-cash charges and benefits and changes in components of operating assets and liabilities. 22 Net cash used in investing activities was $223.5 million in 1998 compared to $18.0 million in 1997. The increase primarily resulted from the acquisitions of businesses including REI and HP, an increase in purchases of property and equipment and additional supplemental purchase price payments in connection with a 1995 acquisition. Net cash used in investing activities increased to $18.0 million in 1997 compared to $10.9 million in 1996 as a result of additional supplemental purchase price payments to the CBRE Investors and L.J. Melody sellers, an increase in purchases of property and equipment and an increase in short-term investments (included in other current assets), offset by cash acquired from the Koll acquisition net of related acquisition costs. Net cash provided by financing activities was $119.4 million in 1998 compared to cash used in financing activities of $65.0 million in 1997. The increase primarily resulted from an increase in net borrowings from the revolving credit facility and issuance of the senior subordinated notes offset in part by the payment for the repurchase of the Company's preferred stock and periodic repayments of the revolving credit facility. Net cash used in financing activities was $65.0 million in 1997 compared to $28.5 million in 1996. The increase primarily resulted from increases in repayments of the senior revolving credit line, senior term loans, and the senior subordinated term loans, offset by borrowings from the new revolving credit facility. As of December 31, 1998, the Company had $386.0 million outstanding in long- term indebtedness, consisting primarily of acquisition debt. Annual aggregate maturities of long-term debt as of December 31, 1998 are as follows: 1999-- $12.3 million; 2000--$9.2 million; 2001--$2.0 million; 2002--$5.5 million; 2003--$167.0 million; and $190.0 million thereafter. In May 1998, the Company amended its revolving credit facility with a bank syndicate to provide a committed line of credit of up to $400.0 million for five years, subject to mandatory reductions of $40.0 million, $80.0 million and $80.0 million on December 31, 1999, 2000 and 2001, respectively. The amount outstanding under this facility was $167.0 million as of December 31, 1998. Interest rate alternatives include Bank of America's reference rate plus 0.50% and LIBOR plus 1.50%. The weighted average rate on amounts outstanding at December 31, 1998 was 6.89%. In May 1998, the Company sold $175.0 million of 8.875% Senior Subordinated Notes ("Subordinated Notes") due on June 1, 2006. The Subordinated Notes are redeemable in whole or in part after June 1, 2002 at 104.438% of par on that date and at declining prices thereafter. On or before June 1, 2001, up to 35.0% of the issued amount may be redeemed at 108.875% of par plus accrued interest solely with the proceeds from an equity offering. In connection with the 1995 Westmark acquisition, the sellers were entitled to a supplemental purchase price based on the operating results of Westmark payable over a period of six years and subject to a maximum aggregate payment of $18.0 million. In August 1997 the Company agreed to buy out the Westmark supplemental purchase price and a related incentive plan for $11.1 million and $2.4 million, respectively. The Company paid $4.0 million of the supplemental purchase price on August 15, 1997. The remaining payments were made on January 15, 1998 and February 14, 1998 for $5.0 million and $2.1 million, respectively. The supplemental purchase price has been recorded as additional goodwill and is being amortized over Westmark goodwill's remaining estimated useful life, initially 30 years. The related incentive plan buyout was paid on August 15, 1997 and is included in merger-related and other nonrecurring charges in the accompanying statement of operations. In October 1997 the Company paid the outstanding balance of the senior and contingent notes related to the L.J. Melody acquisition for $1.1 million and $3.0 million, respectively. Of this amount, $1.7 million was related to the acceleration of the contingent note and is included in merger-related and other nonrecurring charges in the accompanying statements of operations. Effective April 30, 1997, the Company amended the term of its inventoried property loan to extend the settlement date to March 2, 1999. All other terms of the agreement remain in effect. In January of 1999, the inventoried property was sold and the related loan was paid off. Effective October 1996, a dividend on the Company's preferred stock accrued from October 1, 1996 through December 1, 1997, and resulted in a cost of $1.0 million per quarter. In January 1998 the Company borrowed approximately $78.0 million to repurchase all 4.0 million shares of its preferred stock. The total cost to purchase 23 the preferred stock was $77.4 million, including $5.0 million of previously accrued dividends and certain stock options. This transaction reduced income available to common stockholders in the first quarter of 1998 by $32.3 million, which represents the excess of the redemption price over book value and is considered, in accordance with GAAP, a dividend to preferred stockholders for the purpose of calculating earnings per share. The Company expects to have capital expenditures ranging from $25.0 million to $30.0 million in 1999. The Company expects to use net cash provided by operating activities for the next several years primarily to fund capital expenditures primarily for computer related purchases, acquisitions, earnout payments, and to make required principal payments under the Company's outstanding indebtedness. Material future acquisitions that require cash may require new sources of capital such as an expansion of the amended revolving credit facility or issuance of additional equity. The Company believes that it can satisfy its non-acquisition obligations as well as working capital requirements from internally generated cash flow, borrowings under the amended revolving credit facility or any replacement credit facilities for the foreseeable future and in any event for at least the next twelve months. In October 1998, the Company offered all employees under the 1990 Stock Option Plan who hold options that expire in April 1999 a loan equal to 100% of the total exercise price plus 40% of the difference between the current market value of the shares and the exercise price. Loan proceeds were applied towards the total exercise price and payroll withholding taxes. The loans are evidenced by full recourse promissory notes having a maturity of five years at an interest rate of 6.0%. Interest is due annually, while the principal is due the earlier of five years or the sale of the shares. The shares issued under this offering may not be sold until after 18 months from the date of issuance. A total of 405,000 shares were issued under this offering for a total loan amount of $5.3 million. On October 15, 1998 the Company announced that its board of directors had approved a repurchase program under which it would purchase up to $10.0 million of its common stock during the period of October 16, 1998 through December 31, 1998. During this period, the Company purchased 488,900 shares of Common Stock for approximately $8.9 million. Year 2000 Issues Update Introduction The Year 2000 ("Y2K") issue exists because many computer systems and applications currently use only two digits to designate a year, which may cause date-sensitive systems to recognize the year 2000 as 1900 or not at all. The Company's proprietary and client accounting systems, other information technology ("IT") systems and embedded (elevator, HVAC, and other non-IT) systems are all potentially subject to problems related to the inability of such systems to appropriately interpret the upcoming calendar year "2000" and beyond. State of Readiness The Company has assessed and continues to assess the impact of the Y2K on IT and non-IT systems and is in the process of completing the replacement or upgrade of the affected hardware and software. The Company has created an integration team to facilitate testing all of its significant software and to determine whether embedded technology is Y2K compliant. The Company believes that Y2K issues for certain of its acquired businesses outside of the United States, including those in Asia, are more serious than Y2K issues in the United States and Europe but are not material. The local management and the integration team are developing compliance plans for these acquired business locations. Although there can be no assurances, the Company believes that its proprietary accounting systems, information technology and embedded systems will be Y2K compliant by the end of 1999. 24 Costs to Address the Year 2000 Issue To date, the Company estimates that it has spent approximately $6.0 million to address the Y2K issue which includes replacing and upgrading the affected hardware and software. Costs incurred to replace systems will be capitalized. The Company estimates approximately $5.0 million of additional costs to fully address the Y2K issue. The Company does not track the cost and time that its own internal employees spend on the Y2K project. Risks Presented by the Year 2000 Issue The Company relies on third parties for goods and services. The inability of these third parties to conduct their business for a significant period of time due to the Y2K issue could have a material adverse impact on the Company's operations. In addition, certain of the Company's clients require the Company to utilize client-provided IT systems in connection with the Company's provision of services. Failure of any of these client-provided systems could disrupt the Company's operations with respect to the clients involved. Due to the Company's inability to complete an assessment of risk with respect to third-party suppliers and clients, the Company cannot conclusively determine that their occurrence will not have a material adverse impact on the Company's results of operations, liquidity or financial condition. At this time, the Company believes its most reasonably likely worst case scenarios include: temporary failure of one or more infrastructure services provided by third- party suppliers (including utilities and transportation); loss of real-time processing capability by the Company's internal information systems; and interruption of commerce with customers or suppliers that experience Y2K- related failures within their businesses. In a worst case scenario such occurrences could materially and adversely affect the Company's results of operations, liquidity and financial condition. Contingency Plans The project teams working with each of the Company's systems are responsible for developing two types of contingency plans to address these risks. One type manages the risks of Y2K-related failure. This employs iterative planning that identifies and quantifies risks and responds by altering the original plan to avoid the risks or reduce their impact or their probability of occurring. The other type of contingency plan manages recovery from a Y2K-related failure by identifying the potential failures; assessing their impacts; evaluating and selecting operational alternatives; planning the implementation of alternatives; and facilitating the eventual restoration of normal operations. The Company has plans for temporary alternatives in the event that its internal accounting systems fail and transfer data and functionality of any failed client accounting systems to a working backup system, but such plans will not be completed until the third quarter of 1999. Euro Conversion Disclosure The Company does not expect the introduction of the Euro to have a significant impact on its market or the manner in which it conducts business, and believes the related impact on the Company's financials is not material. Approximately six percent of the Company's 1998 business was transacted in the participating member countries. The Company is currently using the legacy currencies to conduct business in these member countries. The Company is in the process of replacing or upgrading the affected hardware and software to allow for dual-currency reporting during the transition period, and issues related but not limited to converting amounts and rounding. The Company anticipates these system upgrades will be fully functional prior to the end of the transition period. Recent Acquisitions On October 20, 1998 the Company, through L.J. Melody, purchased Carey, Brumbaugh, Starman, Phillips, and Associates, Inc. ("Carey, Brumbaugh"), a regional mortgage banking firm for approximately $5.6 million in cash and approximately $2.4 million in notes bearing interest at 9.0% with three annual payments beginning October 1999. Approximately $0.2 million of the $2.4 million notes will be accounted for as deferred cash compensation to certain key executives. The acquisition was accounted for as a purchase. The purchase price 25 has been largely allocated to intangibles and goodwill which will be amortized over their estimated useful lives of 7 and 30 years, respectively. On October 1, 1998 the Company purchased the remaining ownership interests that it did not already own in the Richard Ellis Australia and New Zealand businesses. The costs for the remaining interest was $20.0 million in cash. Virtually all of the revenue of these locations is derived from brokerage and appraisal services. On a preliminary basis, the purchase price has been allocated to intangibles and goodwill which will be amortized over their estimated useful lives ranging up to 30 years. On September 22, 1998 the Company purchased the approximately 73.0% interest that it did not already own in CB Commercial Real Estate Group of Canada, Inc. The Company acquired the remaining interest for approximately $14.3 million in cash. The acquisition was accounted for as a purchase. The purchase price has been allocated to intangibles and goodwill which will be amortized on a straight line basis over their estimated useful lives of 5 and 30 years, respectively. On July 7, 1998 the Company acquired the business of Hillier Parker, a commercial property services partnership operating in the United Kingdom. The acquisition was accounted for as a purchase. The purchase price for Hillier Parker included approximately $63.9 million in cash and $7.1 million in shares of the Company's Common Stock. In addition, the Company assumed a contingent payout plan for key Hillier Parker employees with a potential payout over three years of approximately $12.5 million and assumed various annuity obligations of approximately $15.0 million. On a preliminary basis, the purchase price has largely been allocated to goodwill which will be amortized on a straight line basis over its estimated useful life of 30 years. On July 1, 1998 the Company increased its ownership percentage in CB Commercial/Arnheim & Neely, an existing partnership formed in September 1996, which then combined with the Galbreath Company Mid-Atlantic to form CB Richard Ellis/Pittsburgh, LP. The total purchase price of the Company's interest in the combined enterprise is $5.7 million. On May 31, 1998 the Company acquired Mathews Click and Associates ("Mathews Click"), a property sales, leasing, and management firm, for approximately $10.0 million in cash and potential supplemental payments of $1.9 million payable to the sellers over a period of two years. The acquisition was accounted for as a purchase. The total purchase price including potential supplemental payments, which are contingent upon operating results, will be allocated to intangibles and goodwill which will be amortized on a straight line basis over their estimated useful lives of 7 and 30 years, respectively. Effective May 1, 1998 the Company, through L.J. Melody, acquired Shoptaw- James, Inc. ("Shoptaw-James"), a regional mortgage banking firm for approximately $6.3 million in cash and approximately $2.7 million in notes bearing interest at 9.0% with three annual payments beginning May 1999. The acquisition was accounted for as a purchase. Approximately $0.3 million of the $2.7 million notes will be accounted for as compensation over the term of the notes as the payment of these notes are contingent upon certain key executives' and producers' continued employment with the Company. The approximate $2.4 million of the $2.7 million will be accounted for as supplemental payments to the sellers over a period of three years. The purchase price and supplemental payments have largely been allocated to intangibles and goodwill which will be amortized on a straight line basis over their useful lives of 7 and 30 years, respectively. On April 17, 1998 the Company purchased all of the outstanding shares of REI, an international commercial real estate services firm operating under the name Richard Ellis in major commercial real estate markets worldwide (excluding the United Kingdom). The acquisition was accounted for as a purchase. On a preliminary basis, the purchase price has largely been allocated to goodwill, which will be amortized on a straight line basis over an estimated useful life of 30 years. The purchase price for REI was approximately $103.0 million of which approximately $52.7 million was paid in cash and notes and approximately $50.3 million was paid in shares of the Company's Common Stock. In addition, the Company assumed approximately $14.4 million of long-term debt and minority interest. The Company incurred a one- time charge of $3.8 million associated with the 26 integration of REI's operations and systems into the Company's. For the year ended December 31, 1997, REI had revenues and EBITDA of approximately $118.0 million and $11.7 million, respectively. On February 1, 1998 the Company, through L.J. Melody, acquired all of the issued and outstanding stock of Cauble and Company of Carolina ("Cauble"), a regional mortgage banking firm for approximately $2.2 million, including cash payments of approximately $1.8 million and a note payable of approximately $0.4 million bearing interest at 9.0% with principal payments starting in April 1998. The acquisition was accounted for as a purchase. The purchase price has been allocated to intangibles and goodwill, which will be amortized on a straight line basis over their estimated useful lives of 7 and 30 years, respectively. On January 31, 1998 the Company, through L.J. Melody, acquired certain assets of North Coast Mortgage Company, a regional mortgage banking firm for cash payments of approximately $3.0 million and approximately $0.9 million in notes. Approximately $0.3 million of the $0.9 million notes has been accounted for as supplemental payments to the sellers and approximately $0.6 million as deferred compensation to certain key executives and producers payable in three annual installments beginning in February 1999. The acquisition was accounted for as a purchase. The purchase price and supplemental payments have largely been allocated to intangibles and goodwill, which will be amortized on a straight line basis over their estimated useful lives of 7 and 30 years, respectively. The $0.6 million of deferred cash compensation will be accounted for as compensation over the term of the agreements as the payment of the compensation is contingent upon certain key executives' and producers' continued employment with the Company. On August 28, 1997 the Company purchased Koll through a merger. The acquisition was accounted for as a purchase and resulted in the issuance of equity valued at approximately $132.9 million and the assumption of debt and minority interest of approximately $57.4 million as of August 28, 1997. The initial purchase price in excess of the net identifiable assets acquired totaled $95.3 million including $20.0 million relating to incentive fees on investments fund partnerships which will be earned as assets within the funds are sold and is included, net of amortization, in goodwill and other intangible assets, respectively, on the accompanying balance sheet. Goodwill is being amortized on a straight line basis over 30 years. In the third quarter of 1997 CB Richard Ellis recorded the effects of a charge for merger- related costs of $11.2 million, which is included in total merger-related costs of $12.9 million. The merger did not include several other entities which use the Koll name, including, but not limited to, Koll Construction, Koll Real Estate Group (the development and investment company) and Koll International (resorts and recreational developments). Effective July 1, 1996, CB Commercial Mortgage Company, Inc. ("CB Mortgage"), a wholly-owned subsidiary of the Company, acquired all of the outstanding capital stock of L.J. Melody & Company. The purchase consideration for L.J. Melody was $15.0 million, including a $2.3 million contingent note to the principal seller bearing 10.0% interest with principal payments starting in 1998, $9.0 million in cash and $3.7 million in additional senior notes to the sellers. The notes bore interest of 10.0% per annum, with maturities through July 2001. The $2.3 million note has been accounted for as compensation over the term of the note as the payment of this note was contingent upon the principal seller's continued employment with the Company. In October 1997 the Company paid the outstanding balance of the senior and contingent notes related to the L.J. Melody acquisition of $1.1 million and $3.0 million, respectively. Of this amount, $1.7 million was related to the acceleration of a contingent note and is included in merger-related and other nonrecurring charges in the accompanying statements of operations. The L.J. Melody acquisition was accounted for as a purchase. The Company allocated approximately $3.7 million of the total purchase price to identifiable intangible assets, consisting of loan servicing and asset management contracts, trade name, a covenant not to compete and other intangibles. The remaining $9.0 million and a $1.5 million deferred tax liability resulting from the acquisition were recorded to goodwill. The intangibles are being amortized over their estimated useful lives or the lives of the underlying contracts, as applicable, over periods ranging from three to 13 years. Goodwill is being amortized on a straight line basis over 30 years. 27 Litigation In December 1996, GMH Associates, Inc. ("GMH") filed a lawsuit against Prudential Realty Group ("Prudential") and the Company in Superior Court of Pennsylvania, Franklin County, alleging various contractual and tort claims against Prudential, the seller of a large office complex, and the Company, its agent in the sale, contending that Prudential breached its agreement to sell the property to GMH, breached its duty to negotiate in good faith, conspired with the Company to conceal from GMH that Prudential was negotiating to sell the property to another purchaser and that Prudential and the Company misrepresented that there were no other negotiations for the sale of the property. Following a non-jury trial, the court rendered a decision in favor of GMH and against Prudential and the Company, awarding GMH $20.3 million in compensatory damages, against Prudential and the Company jointly and severally, and $10.0 million in punitive damages, allocating the punitive damage award $7.0 million as against Prudential and $3.0 million as against the Company. Following the denial of motions by Prudential and the Company for a new trial, a judgment was entered on December 3, 1998. Prudential and the Company have filed an appeal of the judgment. The Company believes that it has adequate insurance coverage for the compensatory portion of the judgment and adequate reserves for the punitive portion, as well as potential indemnity claims from Prudential for the entire judgment. In August 1993, a former commissioned sales person of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bergen County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996, a jury returned a verdict against the Company, awarding $6.5 million in general and punitive damages to the plaintiff. Subsequently, the trial court awarded the plaintiff $638,000 in attorneys' fees and costs. Following denial by the trial court of the Company's motions for new trial, reversal of the verdict and reduction of damages, the Company filed an appeal of the verdict and requested a reduction of damages. On March 9, 1999 the appellate court ruled in the Company's favor, reversed the trial court decision and ordered a new trial. Based on available reserves, cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. Management believes that any liability to the Company that may result from disposition of these lawsuits will not have a material effect on the consolidated financial position or results of operations of the Company. Net Operating Losses The Company had federal income tax NOLs of approximately $70.8 million as of December 31, 1998, corresponding to $24.8 million of the Company's $53.3 million in net deferred tax assets before valuation allowance. The ability of the Company to utilize NOLs has been limited in 1998 and will be in subsequent years as a result of the Company's 1996 public offering, the 1997 Koll acquisition and the 1998 repurchase of preferred stock which cumulatively caused a more than 50.0% change of ownership within a three year period. As a result of the limitation, the Company will be able to use approximately $26.0 million of its NOL in 1998 and in each subsequent year. The amount of NOLs is, in any event, subject to some uncertainty until the statute of limitations lapses after their utilization to offset taxable income. New Accounting Pronouncements The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information during the quarter ended December 31, 1998. SFAS 131 requires the use of the "management approach" for segment reporting, which is based on the way the chief operating decision maker organizes segments within a company for making operating decisions and assessing performance. The adoption of this statement did not have a material impact on the Company's financial statements. 28 In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-up Activities. SOP 98-5, which is effective for financial statements for fiscal years beginning after December 15, 1998, requires costs of start-up activities and organization costs to be expensed as incurred. The adoption of this statement is not expected to have a material impact on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing of or method of its adoption of SFAS No. 133. Based on derivative instruments outstanding, SFAS No. 133 is not anticipated to have a significant impact on earnings or other components of comprehensive income. Safe Harbor Statement Regarding Outlook and Other Forward-Looking Data Portions of the Annual Report, including Management's Discussion and Analysis, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: commercial real estate vacancy levels; employment conditions and their effect on vacancy rates; property values; rental rates; any general economic recession domestically or internationally; and general conditions of financial liquidity for real estate transactions. Report of Management The Company's management is responsible for the integrity of the financial data reported by the Company and its subsidiaries. Fulfilling this responsibility requires the preparation and presentation of consolidated financial statements in accordance with generally accepted accounting principles. Management uses internal accounting controls, corporate-wide policies and procedures and judgment so that such statements reflect fairly the consolidated financial position, results of operations and cash flows of the Company. 29 Quarterly Results of Operations and Other Financial Data The following table sets forth certain unaudited consolidated statement of operations data for each of the Company's last twelve quarters and the percentage of the Company's revenues represented by each line item reflected in each consolidated income statement. In the opinion of management, this information has been presented on the same basis as the consolidated financial statements included in Item 8, and includes all adjustments, consisting only of normal recurring adjustments and accruals, that the Company considers necessary for a fair presentation. The unaudited quarterly information should be read in conjunction with the audited financial statements of the Company and the notes thereto. The operating results for any quarter are not necessarily indicative of the results for any future period.
1998 1997 --------------------------------------- -------------------------------------- Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 -------- --------- -------- -------- -------- -------- -------- -------- (Dollars in thousands) Results of Operations: Revenue........... $330,289 $ 273,803 $255,267 $175,144 $260,682 $177,520 $157,958 $134,064 Costs and expenses: Commissions, fees and other incentives....... 136,692 113,559 113,368 83,714 126,687 87,588 82,521 67,607 Operating, administrative and other........ 145,594 124,309 111,063 78,958 90,107 69,046 60,206 56,390 Merger-related and other nonrecurring charges.......... - - 16,585 - - 12,924 - - Depreciation and amortization..... 10,099 9,337 7,427 5,322 5,788 6,098 3,053 3,121 -------- --------- -------- -------- -------- -------- -------- -------- Operating income... 37,904 26,598 6,824 7,150 38,100 1,864 12,178 6,946 Interest income.... 1,086 703 538 727 639 740 587 632 Interest expense... 9,688 9,628 7,410 4,321 3,773 4,158 4,104 3,745 -------- --------- -------- -------- -------- -------- -------- -------- Income (loss) before provision (benefit) for income tax........ 29,302 17,673 (48) 3,556 34,966 (1,554) 8,661 3,833 Provision (benefit) for income tax.... 15,669 7,534 1,132 1,591 15,772 (569) 3,795 1,560 Reduction of valuation allowances........ - - - - - - - - -------- --------- -------- -------- -------- -------- -------- -------- Net provision (benefit) for income tax........ 15,669 7,534 1,132 1,591 15,772 (569) 3,795 1,560 -------- --------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary items............. 13,633 10,139 (1,180) 1,965 19,194 (985) 4,866 2,273 Extraordinary items, net........ - - - - - 951 - - -------- --------- -------- -------- -------- -------- -------- -------- Net income (loss).. $ 13,633 $ 10,139 $ (1,180) $ 1,965 $ 19,194 $ (1,936) $ 4,866 $ 2,273 ======== ========= ======== ======== ======== ======== ======== ======== Other Financial Data: EBITDA............. $ 48,003 $ 35,935 $ 30,836 $ 12,472 $ 43,888 $ 20,886 $ 15,231 $ 10,067 Net cash provided by (used in) operating activities........ $ 49,528 $ 27,798 $ 35,011 $(35,723) $ 55,055 $ 22,328 $ 19,218 $(15,766) Net cash (used in) provided by investing activities........ $(23,724) $(117,355) $(59,998) $(22,443) $ (7,702) $ 330 $ (803) $ (9,843) Net cash (used in) provided by financing activities........ $(29,372) $ 71,188 $ 47,087 $ 30,535 $(43,795) $(29,314) $ (3,512) $ 11,657
1996 -------------------------------------- Dec. 31 Sept. 30 June 30 March 31 -------- -------- -------- -------- (Dollars in thousands) Results of Operations: Revenue............................... $192,205 $147,168 $130,954 $112,741 Costs and expenses: Commissions, fees and other incentives........................... 96,801 74,196 66,262 55,007 Operating, administrative and other... 69,603 56,042 53,594 49,560 Merger-related and other nonrecurring charges.............................. - - - - Depreciation and amortization......... 3,825 3,431 3,038 3,280 -------- -------- -------- -------- Operating income....................... 21,976 13,499 8,060 4,894 Interest income........................ 468 286 354 395 Interest expense....................... 6,240 6,196 5,759 5,928 -------- -------- -------- -------- Income (loss) before provision (benefit) for income tax.............. 16,204 7,589 2,655 (639) Provision (benefit) for income tax..... 6,550 4,220 438 (48) Reduction of valuation allowances...... (15,500) (40,400) - - -------- -------- -------- -------- Net provision (benefit) for income tax................................... (8,950) (36,180) 438 (48) -------- -------- -------- -------- Income (loss) before extraordinary items................................. 25,154 43,769 2,217 (591) Extraordinary items, net............... - - - - -------- -------- -------- -------- Net income (loss)...................... $ 25,154 $ 43,769 $ 2,217 $ (591) ======== ======== ======== ======== Other Financial Data: EBITDA................................. $ 25,801 $ 16,930 $ 11,098 $ 8,174 Net cash provided by (used in) operating activities.................. $ 41,524 $ 22,150 $ 13,865 $(11,845) Net cash (used in) provided by investing activities.................. $ (1,389) $ (9,401) $ 1,768 $ (1,884) Net cash (used in) provided by financing activities.................. $(15,710) $(15,297) $ (4,306) $ 6,808
30
As a Percentage of Revenues --------------------------------------------------------------------- 1998 1997 ---------------------------------- ---------------------------------- Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 ------- -------- ------- -------- ------- -------- ------- -------- Results of Operations: Revenue................ 100.0% 100.0% 100.0 % 100.0% 100.0% 100.0 % 100.0% 100.0% Costs and expenses: Commissions, fees and other incentives...... 41.4 41.5 44.4 47.8 48.6 49.4 52.2 50.4 Operating, administrative and other................. 44.1 45.4 43.5 45.1 34.6 38.9 38.1 42.1 Merger-related and other nonrecurring charges............... - - 6.5 - - 7.3 - - Depreciation and amortization.......... 3.1 3.4 2.9 3.0 2.2 3.4 1.9 2.3 ----- ----- ----- ----- ----- ----- ----- ----- Operating income........ 11.4 9.7 2.7 4.1 14.6 1.0 7.8 5.2 Interest income......... 0.3 0.3 0.2 0.4 0.2 0.4 0.3 0.5 Interest expense........ 2.9 3.5 2.9 2.5 1.4 2.3 2.6 2.8 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before provision (benefit) for income tax............. 8.8 6.5 - 2.0 13.4 (0.9) 5.5 2.9 Provision for income tax.................... 4.7 2.8 0.4 0.9 6.0 (0.3) 2.4 1.2 Reduction of valuation allowances............. - - - - - - - - ----- ----- ----- ----- ----- ----- ----- ----- Net provision (benefit) for income tax......... 4.7 2.8 0.4 0.9 6.0 (0.3) 2.4 1.2 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before extraordinary items.... 4.1 3.7 (0.4) 1.1 7.4 (0.6) 3.1 1.7 Extraordinary items, net.................... - - - - - 0.5 - - ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)....... 4.1% 3.7% (0.4)% 1.1% 7.4% (1.1)% 3.1% 1.7% ===== ===== ===== ===== ===== ===== ===== =====
As a Percentage of Revenues --------------------------------- 1996 --------------------------------- Dec. 31 Sept. 30 June 30 March 31 ------- -------- ------- -------- Results of Operations: Revenue.................................... 100.0% 100.0% 100.0% 100.0 % Costs and expenses: Commissions, fees and other incentives..... 50.4 50.4 50.6 48.8 Operating, administrative and other........ 36.2 38.1 40.9 44.0 Merger-related and other nonrecurring charges................................... - - - - Depreciation and amortization.............. 2.0 2.3 2.3 2.9 ----- ----- ----- ----- Operating income............................ 11.4 9.2 6.2 4.3 Interest income............................. 0.2 0.2 0.3 0.3 Interest expense............................ 3.2 4.2 4.4 5.2 ----- ----- ----- ----- Income (loss) before provision (benefit) for income tax................................. 8.4 5.2 2.1 (0.6) Provision for income tax.................... 3.4 2.9 0.3 0.0 Reduction of valuation allowances........... (8.1) (27.5) - - ----- ----- ----- ----- Net provision (benefit) for income tax...... (4.7) (24.6) 0.3 0.0 ----- ----- ----- ----- Income (loss) before extraordinary items.... 13.1 29.8 1.8 (0.6) Extraordinary items, net.................... - - - - ----- ----- ----- ----- Net income (loss)........................... 13.1% 29.8% 1.8% (0.6)% ===== ===== ===== =====
31 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk consists of foreign currency exchange rate fluctuations related to international operations and changes in interest rates on debt obligations. Following the REI and HP acquisitions, approximately 20.0% of the Company's business is transacted in local currencies of foreign countries. The Company attempts to manage its exposure primarily by balancing monetary assets and liabilities, and maintaining cash positions only at levels necessary for operating purposes. While the Company's international results of operations as measured in dollars are subject to foreign exchange rate fluctuations, the related risk is not considered material. The Company routinely monitors its transaction exposure to currency rate changes, and enters into currency forward and option contracts to limit such exposure, as appropriate. Such contracts are usually short term in nature ranging from ten days to two months. Gains and losses on contracts are deferred until the transaction being hedged is finalized. The Company does not engage in any speculative activities. In 1998, the Company entered into two forward contracts amounting to approximately $15.0 million, and two option contracts amounting to approximately $22.8 million to hedge the risk associated with fluctuations in foreign currency exchange rates relating to certain international acquisitions. The duration of these contracts ranged from ten days to two months. The results of these hedging activities were not material. At December 31, 1998, the Company had no outstanding contracts. The Company manages its interest expense by using a combination of fixed and variable rate debt. The Company utilizes sensitivity analyses to assess the potential effect of its variable rate debt. If interest rates were to increase by 70 basis points (approximately 10.0% of the Company's weighted-average variable rate at year-end), the net impact would be a decrease of $1.4 million on annual pre-tax income and cash flow. The Company's fixed and variable long- term debt at December 31, 1998 consisted of the following:
LIBOR Bank Commercial Fixed Plus Prime Sterling LIBOR Base Rate Paper Borrowing Year of Maturity Rate 1.5% Plus 0.5% Minus 1.5% Plus 2.0% Rate plus 3.5% Total ---------------- -------- -------- --------- -------------- --------- --------------- -------- 1999.................... $ 4,375 $ - $ - $ - $ 875 $7,093 $ 12,343 2000.................... 8,346 - - - 875 - 9,221 2001.................... 1,841 - - - 125 - 1,966 2002.................... 29 - - 5,439 - - 5,468 2003.................... 12 165,000 2,000 - - - 167,012 Thereafter(1)........... 190,024 - - - - - 190,024 -------- -------- ------ ------ ------ ------ -------- Total................. $204,627 $165,000 $2,000 $5,439 $1,875 $7,093 $386,034 ======== ======== ====== ====== ====== ====== ======== Weighted Average Interest Rate.......... 9.02% 6.87% 8.25% 4.45% 9.75% 9.09% 8.04% ======== ======== ====== ====== ====== ====== ========
- -------- (1) Includes Senior Subordinated Note. Based on dealer's quotes, the estimated fair value of the Company's $175.0 million Senior Subordinated Note is $177.2 million. Estimated fair values for other liabilities are not presented because the Company believes that they are not materially different from book value, primarily because the majority of the Company's remaining debt is based on variable rates that approximate terms that the Company could obtain at December 31, 1998. 32 Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants................................ 34 Consolidated Balance Sheets as of December 31, 1998 and 1997............ 35 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996.................................................... 36 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.................................................... 37 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1998, 1997 and 1996................................. 38 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996....................................... 38 Notes to Consolidated Financial Statements.............................. 39 SCHEDULES SUPPORTING THE CONSOLIDATED FINANCIAL STATEMENTS Schedule II--Valuation and Qualifying Accounts.......................... 61 Exhibit 12--Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.................................................... 62
All other schedules and exhibits are not submitted because either they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto. 33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of CB Richard Ellis Services, Inc.: We have audited the accompanying consolidated balance sheets of CB Richard Ellis Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998, and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), comprehensive income and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CB Richard Ellis Services, Inc. and subsidiaries as of December 31, 1998, and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commissions rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Los Angeles, California February 15, 1999 34 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share data)
December 31, -------------------- 1998 1997 --------- --------- ASSETS ------ Current Assets: Cash and cash equivalents.............................. $ 19,551 $ 47,181 Receivables, less allowance of $13,348 and $8,980 for doubtful accounts at December 31, 1998 and 1997, respectively.......................................... 131,512 77,358 Deferred taxes......................................... 3,529 2,890 Prepaid expenses....................................... 13,459 9,142 Other assets........................................... 8,353 8,719 --------- --------- Total current assets................................. 176,404 145,290 Property and equipment, net.............................. 58,366 50,309 Goodwill, net of accumulated amortization of $25,060 and $13,561 at December 31, 1998 and 1997................... 445,124 196,358 Other intangible assets, net of accumulated amortization of $268,497 and $261,519 at December 31, 1998 and 1997.. 63,913 43,026 Prepaid pension expenses................................. 28,241 - Deferred taxes........................................... 23,100 34,967 Investments in and advances to unconsolidated subsidiaries............................................ 31,633 7,958 Other assets, net........................................ 30,111 22,192 --------- --------- Total assets......................................... $ 856,892 $ 500,100 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Compensation and employee benefits..................... $ 66,245 $ 55,712 Accounts payable and accrued expenses.................. 105,027 57,032 Reserve for bonus and profit sharing................... 39,270 33,538 Current maturities of long-term debt................... 12,343 4,679 Current portion of capital lease obligations........... 2,862 1,655 --------- --------- Total current liabilities............................ 225,747 152,616 Long-term debt, less current maturities: Senior term loans...................................... 183,502 136,551 Senior subordinated notes, less unamortized discount of $2,099 at December 31, 1998........................... 172,901 - Other long-term debt................................... 17,288 9,722 --------- --------- Total long-term debt................................. 373,691 146,273 Other long-term liabilities.............................. 60,737 35,768 --------- --------- Total liabilities.................................... 660,175 334,657 Minority interest........................................ 5,875 7,672 Commitments and contingencies Stockholders' Equity: Preferred stock, $.01 par value, 4,000,000 shares outstanding as of December 31, 1997................... - 40 Common stock, $.01 par value, 20,636,134 and 18,768,200 shares outstanding as of December 31, 1998 and 1997, respectively.......................................... 211 188 Additional paid-in capital............................. 349,796 333,981 Notes receivable from sale of stock.................... (5,654) (5,956) Accumulated deficit.................................... (145,767) (170,324) Currency translation adjustment........................ 1,139 (158) Treasury stock, 488,900 shares outstanding as of December 31, 1998..................................... (8,883) - --------- --------- Total stockholders' equity........................... 190,842 157,771 --------- --------- Total liabilities and stockholders' equity........... $ 856,892 $ 500,100 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 35 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Year Ended December 31, --------------------------------- 1998 1997 1996 ---------- ---------- ---------- Revenue.................................... $1,034,503 $ 730,224 $ 583,068 Costs and expenses: Commissions, fees and other incentives... 447,333 364,403 292,266 Operating, administrative and other...... 459,924 275,749 228,799 Merger-related and other nonrecurring charges................................. 16,585 12,924 - Depreciation and amortization............ 32,185 18,060 13,574 ---------- ---------- ---------- Operating income........................... 78,476 59,088 48,429 Interest income............................ 3,054 2,598 1,503 Interest expense........................... 31,047 15,780 24,123 ---------- ---------- ---------- Income before provision (benefit) for income tax................................ 50,483 45,906 25,809 Provision for income tax................... 25,926 20,558 11,160 Reduction of valuation allowances.......... - - (55,900) ---------- ---------- ---------- Net provision (benefit) for income tax..... 25,926 20,558 (44,740) ---------- ---------- ---------- Income before extraordinary items.......... 24,557 25,348 70,549 Extraordinary items, net................... - 951 - ---------- ---------- ---------- Net income................................. $ 24,557 $ 24,397 $ 70,549 ========== ========== ========== Preferred stock dividend................... $ - $ 4,000 $ 1,000 ========== ========== ========== Deemed dividend on preferred stock......... $ 32,273 $ - $ - ========== ========== ========== Net income (loss) applicable to common stockholders.............................. $ (7,716) $ 20,397 $ 69,549 ========== ========== ========== Basic earnings (loss) per share............ $ (0.38) $ 1.34 $ 5.05 ========== ========== ========== Weighted average shares outstanding for basic earnings (loss) per share........... 20,136,117 15,237,914 13,783,882 ========== ========== ========== Diluted earnings (loss) per share.......... $ (0.38) $ 1.28 $ 4.99 ========== ========== ========== Weighted average shares outstanding for diluted earnings (loss) per share......... 20,136,117 15,996,929 14,126,636 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 36 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended December 31, ----------------------------- 1998 1997 1996 --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................... $ 24,557 $ 24,397 $ 70,549 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization excluding deferred financing costs................... 32,185 18,060 13,574 Amortization of deferred financing costs.... 1,184 983 2,840 Extraordinary items, net.................... - 951 - Equity interest in (earnings) loss of unconsolidated subsidiaries................ (3,443) 113 (145) Provision for litigation, doubtful accounts and other.................................. 5,185 2,421 9,543 Deferred interest........................... - - 6,927 Deferred compensation....................... 14,738 6,121 2,159 Deferred taxes.............................. 14,394 17,122 (46,128) Increase in receivables....................... (24,846) (6,073) (14,378) Decrease (increase) in prepaid expenses and other assets................................. 317 (10,634) 794 Increase in compensation and employee benefits payable...................................... 7,782 19,772 19,793 Increase (decrease) in accounts payable and accrued expenses............................. 2,615 2,903 (696) Increase in other operating liabilities....... 1,946 4,699 862 --------- -------- -------- Net cash provided by operating activities............................... 76,614 80,835 65,694 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment........... (29,715) (9,927) (3,002) Proceeds from collections on notes receivable................................... 362 2,236 2,726 Increase in intangibles and goodwill.......... (14,595) (8,478) (1,321) Acquisitions of businesses including net assets acquired, intangibles and goodwill.... (189,895) 3,216 (8,625) Other investing activities, net............... 10,323 (5,065) (684) --------- -------- -------- Net cash used in investing activities..... (223,520) (18,018) (10,906) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from senior revolving credit line.... - 16,000 21,000 Repayment of senior revolving credit line..... - (16,000) (21,000) Proceeds from senior term loans............... 315,000 155,000 - Repayment of senior term loans................ (268,000) (90,415) (94,978) Repayment of other loans...................... (14,701) (55,976) (2,379) Proceeds from senior subordinated term loan... 172,788 - - Repayment of senior subordinated term loan.... - (65,872) (5,044) Payment of dividends payable.................. (5,000) - - Repurchase of preferred stock................. (72,331) - - Repurchase of common stock.................... (8,883) - - Repayment of capital leases................... (1,655) (2,773) (2,945) Minority interest payments.................... (2,902) (1,990) - Other financing activities, net............... 5,122 (2,938) 76,841 --------- -------- -------- Net cash provided by (used in) financing activities............................... 119,438 (64,964) (28,505) --------- -------- -------- Net (decrease) increase in cash and cash equivalents.................................... (27,468) (2,147) 26,283 Cash and cash equivalents, at beginning of period......................................... 47,181 49,328 23,045 Effect of exchange rate changes on cash......... (162) - - --------- -------- -------- Cash and cash equivalents, at end of period..... $ 19,551 $ 47,181 $ 49,328 ========= ======== ======== SUPPLEMENTAL DATA: Cash paid during the year for: Interest (none capitalized)................... $ 27,528 $ 14,073 $ 25,899 Income taxes, net of refunds.................. $ 3,395 $ 2,736 $ 1,284 Non-cash investing and financing activities: Equipment acquired under capital leases....... $ - $ 2,299 $ 1,701
The accompanying notes are an integral part of these consolidated financial statements. 37 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in thousands)
Notes Accumulated Additional receivable other Preferred Common paid-in from sale Accumulated comprehensive Treasury stock stock capital of stock deficit income stock Total --------- ------ ---------- ---------- ----------- ------------- -------- --------- Balance, December 31, 1995................... $ 40 $ 93 $110,326 $ - $(265,270) $ 123 $ - $(154,688) Net income.............. - - - - 70,549 - - 70,549 Common stock issued for deferred compensation and other incentives... - 8 7,660 (5,109) - - - 2,559 Common stock options exercised.............. - - 100 - - - - 100 Preferred dividend accrual................ - - (1,000) - - - - (1,000) Net proceeds from initial public offering............... - 32 79,399 - - - - 79,431 Benefit of permanent deferred tax asset..... - - 1,541 - - - - 1,541 Foreign currency translation loss....... - - - - - (7) - (7) ---- ---- -------- ------- --------- ------ ------- --------- Balance, December 31, 1996................... 40 133 198,026 (5,109) (194,721) 116 - (1,515) Net income.............. - - - - 24,397 - - 24,397 Common stock issued for incentive plans........ - - 2,996 (897) - - - 2,099 Earned compensation, deferred compensation plan................... - - 1,711 - - - - 1,711 Collection on stock subscription notes..... - - - 50 - - - 50 Common stock issued for Koll acquisition....... - 52 132,821 - - - - 132,873 Common stock options exercised.............. - 3 2,427 - - - - 2,430 Preferred dividend accrual................ - - (4,000) - - - - (4,000) Foreign currency translation loss....... - - - - - (274) - (274) ---- ---- -------- ------- --------- ------ ------- --------- Balance, December 31, 1997................... 40 188 333,981 (5,956) (170,324) (158) - 157,771 Net income.............. - - - - 24,557 - - 24,557 Common stock issued for incentive plans........ - 1 4,163 (962) - - - 3,202 Earned compensation, deferred compensation plan................... - - 5,361 - - - - 5,361 Collection on, net of cancellation of notes receivable from employee stock incentive plan......... - - (646) 1,264 - - - 618 Common stock issued for REI and Hillier Parker acquisitions........... - 15 58,486 - - - - 58,501 Common stock options exercised.............. - 7 8,835 - - - - 8,842 Tax deduction from exercise of stock options................ - - 11,907 - - - - 11,907 Foreign currency translation gain....... - - - - - 1,297 - 1,297 Purchase of preferred stock.................. (40) - (72,291) - - - - (72,331) Purchase of common stock.................. - - - - - - (8,883) (8,883) ---- ---- -------- ------- --------- ------ ------- --------- Balance, December 31, 1998................... $ - $211 $349,796 $(5,654) $(145,767) $1,139 $(8,883) $ 190,842 ==== ==== ======== ======= ========= ====== ======= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands)
Year ended December 31, ------------------------ 1998 1997 1996 ------- ------- ------- Net income............................................ $24,557 $24,397 $70,549 Other comprehensive income............................ 1,297 (274) (7) ------- ------- ------- Comprehensive income.................................. $25,854 $24,123 $70,542 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 38 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 1. Organization and Acquisitions Organization. CB Richard Ellis Services, Inc. ("CB Richard Ellis") or (the "Company") is a holding company that conducts its operations primarily through its subsidiaries CB Richard Ellis, Inc., CB Commercial Limited (formerly REI Limited and the United Kingdom holding company for the various Richard Ellis companies operating outside the United Kingdom and the United States), L.J. Melody & Company ("L.J. Melody"), CB Richard Ellis Investors, L.L.C. and CB Hillier Parker Limited. On November 25, 1996 CB Richard Ellis completed an initial public offering (the "Offering") of 4,347,000 shares of common stock, par value $.01 per share (the "Common Stock"). The net proceeds from the Offering of $79.5 million were used to repay a portion of CB Richard Ellis' then outstanding senior secured indebtedness and senior subordinated indebtedness. Nature of Operations. The Company provides a full range of real estate services worldwide to commercial real estate tenants, owners and investors through approximately 230 offices worldwide including but not limited to the United States, Argentina, Australia, Brazil, Belgium, Canada, France, Germany, Hong Kong, India, Italy, the Netherlands, New Zealand, Peoples Republic of China, Portugal, Singapore, Spain, Switzerland, Taiwan, and the United Kingdom. The Company's services include (i) brokerage services whereby the Company facilitates the sale and lease of properties ("Brokerage Services"); (ii) transaction management, consulting services and facilities management services to corporate real estate users ("Corporate Services"); (iii) property management and related services ("Asset Services"); and (iv) capital market activities, including mortgage banking, brokerage and servicing, investment management and advisory services, investment property transactions (including acquisitions and sales on behalf of investors), real estate market research and valuation and appraisal services (collectively "Financial Services"). The Company's diverse client base includes local, national and multinational corporations, financial institutions, pension funds and other tax exempt entities, local, state and national governmental entities, and individuals. A significant portion of the Company's revenue is seasonal. Historically, this seasonality has caused the Company's revenue, operating income and net income to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. In addition, the Company's operations are directly affected by actual and perceived trends in various national and economic conditions, including interest rates, the availability of credit to finance commercial real estate transactions and the impact of tax laws. To date, the Company does not believe that general inflation has had a material impact upon its operations. Revenues, commissions and other variable costs related to revenues are primarily affected by real estate market supply and demand rather than general inflation. Acquisitions. On October 20, 1998 the Company, through L.J. Melody, purchased Carey, Brumbaugh, Starman, Phillips, and Associates, Inc. ("Carey, Brumbaugh"), a regional mortgage banking firm for approximately $5.6 million in cash and approximately $2.4 million in notes bearing interest at 9.0% with three annual payments beginning October 1999. Approximately $0.2 million of the $2.4 million notes will be accounted for as deferred cash compensation to certain key executives. The acquisition was accounted for as a purchase. The purchase price has been largely be allocated to intangibles and goodwill which will be amortized over their estimated useful lives of 7 and 30 years, respectively. On October 1, 1998 the Company purchased the remaining ownership interests that it did not already own in the Richard Ellis Australia and New Zealand businesses. The costs for the remaining interest was $20.0 million in cash. Virtually all of the revenue of these locations is derived from brokerage and appraisal services. On a preliminary basis, the purchase price has been allocated to intangibles and goodwill which will be amortized over their estimated useful lives ranging up to 30 years. 39 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On September 22, 1998 the Company purchased the approximately 73.0% interest that it did not already own in CB Commercial Real Estate Group of Canada, Inc. The Company acquired the remaining interest for approximately $14.3 million in cash. The acquisition was accounted for as a purchase. The purchase price has been allocated to intangibles and goodwill which will be amortized on a straight line basis over their estimated useful lives of 5 and 30 years, respectively. On July 7, 1998 the Company acquired the business of Hillier Parker, a commercial property services partnership operating in the United Kingdom. The acquisition was accounted for as a purchase. The purchase price for Hillier Parker included approximately $63.9 million in cash and $7.1 million in shares of the Company's Common Stock. In addition, the Company assumed a contingent payout plan for key Hillier Parker employees with a potential payout over three years of approximately $12.5 million and assumed various annuity obligations of approximately $15.0 million. On a preliminary basis, the purchase price has largely been allocated to goodwill which will be amortized on a straight line basis over its estimated useful life of 30 years. On July 1, 1998 the Company increased its ownership percentage in CB Commercial/Arnheim & Neely, an existing partnership formed in September 1996, which then combined with the Galbreath Company Mid-Atlantic to form CB Richard Ellis/Pittsburgh, LP. The total purchase price of the Company's interest in the combined enterprise is $5.7 million. On May 31, 1998 the Company acquired Mathews Click and Associates ("Mathews Click"), a property sales, leasing, and management firm, for approximately $10.0 million in cash and potential supplemental payments of $1.9 million payable to the sellers over a period of two years. The acquisition was accounted for as a purchase. The total purchase price including potential supplemental payments, which are contingent upon operating results, will be allocated to intangibles and goodwill which will be amortized on a straight line basis over their estimated useful lives of 7 and 30 years, respectively. Effective May 1, 1998 the Company, through L.J. Melody, acquired Shoptaw- James, Inc. ("Shoptaw-James"), a regional mortgage banking firm for approximately $6.3 million in cash and approximately $2.7 million in notes bearing interest at 9.0% with three annual payments beginning May 1999. The acquisition was accounted for as a purchase. Approximately $0.3 million of the $2.7 million notes will be accounted for as compensation over the term of the notes as the payment of these notes are contingent upon certain key executives' and producers' continued employment with the Company. Approximately $2.4 million of the $2.7 million will be accounted for as supplemental payments to the sellers over a period of three years. The purchase price and supplemental payments have largely been allocated to intangibles and goodwill which will be amortized on a straight line basis over their useful lives of 7 and 30 years, respectively. On April 17, 1998 the Company purchased all of the outstanding shares of REI, an international commercial real estate services firm operating under the name Richard Ellis in major commercial real estate markets worldwide (excluding the United Kingdom). The acquisition was accounted for as a purchase. On a preliminary basis, the purchase price has largely been allocated to goodwill, which will be amortized on a straight line basis over an estimated useful life of 30 years. The purchase price for REI was approximately $103.0 million of which approximately $52.7 million was paid in cash and notes and approximately $50.3 million was paid in shares of the Company's Common Stock. In addition, the Company assumed approximately $14.4 million of long-term debt and minority interest. The Company incurred a one- time charge of $3.8 million associated with the integration of REI's operations and systems into the Company's. For the year ended December 31, 1997, REI had revenues and EBITDA of approximately $118.0 million and $11.7 million, respectively. On February 1, 1998 the Company, through L.J. Melody, acquired all of the issued and outstanding stock of Cauble and Company of Carolina ("Cauble"), a regional mortgage banking firm for approximately $2.2 million, including cash payments of approximately $1.8 million and a note payable of approximately 40 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $0.4 million bearing interest at 9.0% with principal payments starting in April 1998. The acquisition was accounted for as a purchase. The purchase price has been allocated to intangibles and goodwill, which will be amortized on a straight line basis over their estimated useful lives of 7 and 30 years, respectively. On January 31, 1998 the Company, through L.J. Melody, acquired certain assets of North Coast Mortgage Company, a regional mortgage banking firm for cash payments of approximately $3.0 million and approximately $0.9 million in notes. Approximately $0.3 million of the $0.9 million notes has been accounted for as supplemental payments to the sellers and approximately $0.6 million as deferred compensation to certain key executives and producers payable in three annual installments beginning in February 1999. The acquisition was accounted for as a purchase. The purchase price and supplemental payments have largely been allocated to intangibles and goodwill, which will be amortized on a straight line basis over their estimated useful lives of 7 and 30 years, respectively. The $0.6 million of deferred cash compensation will be accounted for as compensation over the term of the agreements as the payment of the compensation is contingent upon certain key executives' and producers' continued employment with the Company. On August 28, 1997 the Company purchased Koll Real Estate Services ("Koll") through a merger. The acquisition was accounted for as a purchase and resulted in the issuance of equity valued at approximately $132.9 million and the assumption of debt and minority interest of approximately $57.4 million as of August 28, 1997. The initial purchase price in excess of the net identifiable assets acquired totaled $95.3 million including $20.0 million relating to incentive fees on investments fund partnerships which will be earned as assets within the funds are sold and is included, net of amortization, in goodwill and other intangible assets, respectively, on the accompanying balance sheet. Goodwill is being amortized on a straight line basis over 30 years. In the third quarter of 1997 CB Richard Ellis recorded the effects of a charge for merger-related costs of $11.2 million, which is included in total merger- related costs of $12.9 million. The merger did not include several other entities which use the Koll name, including, but not limited to, Koll Construction, Koll Real Estate Group (the development and investment company) and Koll International (resorts and recreational developments). Effective July 1, 1996, CB Commercial Mortgage Company, Inc. ("CB Mortgage"), a wholly-owned subsidiary of the Company, acquired all of the outstanding capital stock of L.J. Melody & Company. The purchase consideration for L.J. Melody was $15.0 million, including a $2.3 million contingent note to the principal seller bearing 10.0% interest with principal payments starting in 1998, $9.0 million in cash and $3.7 million in additional senior notes to the sellers. The notes bore interest of 10.0% per annum, with maturities through July 2001. The $2.3 million note has been accounted for as compensation over the term of the note as the payment of this note was contingent upon the principal seller's continued employment with the Company. In October 1997 the Company paid the outstanding balance of the senior and contingent notes related to the L.J. Melody acquisition of $1.1 million and $3.0 million, respectively. Of this amount, $1.7 million was related to the acceleration of a contingent note and is included in merger-related and other nonrecurring charges in the accompanying statements of operations. The L.J. Melody acquisition was accounted for as a purchase. The Company allocated approximately $3.7 million of the total purchase price to identifiable intangible assets, consisting of loan servicing and asset management contracts, trade name, a covenant not to compete and other intangibles. The remaining $9.0 million and a $1.5 million deferred tax liability resulting from the acquisition were recorded to goodwill. The intangibles are being amortized over their estimated useful lives or the lives of the underlying contracts, as applicable, over periods ranging from three to 13 years. Goodwill is being amortized on a straight line basis over 30 years. The assets and liabilities of certain acquired companies, along with the related goodwill, intangibles and indebtedness, are reflected in the accompanying consolidated financial statements as of December 31, 1998 and 41 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1997. The results of operations of the acquired companies are included in the consolidated results from the dates they were acquired. The unaudited pro forma results of operations of the Company's material acquisitions for the years ended December 31, 1998, 1997 and 1996, assuming the L.J. Melody and Koll acquisitions had occurred on January 1, 1996 and the REI acquisition had occurred on January 1, 1997 (amounts in thousands except per share data):
Year Ended December 31 ------------------------------ 1998 1997 1996 ---------- -------- -------- (unaudited) Revenue..................................... $1,051,114 $937,905 $701,301 Net income (loss)........................... 15,586 (2,433) 68,068 Net income (loss) applicable to common stockholders............................... (16,687) (6,433) 67,068 Earnings (loss) per share Basic..................................... (0.81) (0.32) 3.53 Diluted................................... (0.81) (0.32) 3.52
The proforma results do not necessarily represent results which would have occurred if the acquisitions had taken place on the dates assumed above, nor are they indicative of the results of future combined operations. The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies which might be achieved from combined operations. Further, Koll historical results for the first eight months of 1997 and REI historical results for the first three months of 1998 include certain nonrecurring adjustments. 2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with an original maturity of less than three months. Goodwill and Other Intangible Assets Goodwill at December 31, 1998 consisted of $425.5 million related to the 1995 through 1998 acquisitions which is being amortized over an estimated useful life of 30 years and $19.6 million related to the Company's original acquisition in 1989 which is being amortized over an estimated useful life of 40 years. Other intangible assets at December 31, 1998 included approximately $7.9 million of deferred financing costs and $56.0 million of intangibles stemming from the 1995 through 1998 acquisitions. The Company periodically evaluates the recoverability of the carrying amount of goodwill and other intangible assets. In this assessment, the Company considers macro market conditions and trends in the Company's relative market position, its capital structure, lender relationships and the estimated undiscounted future cash flows associated with these assets. If any of the significant assumptions inherent in this assessment materially change due to market, economic and/or other factors, the recoverability is assessed based on the revised assumptions and resultant undiscounted cash flows. If such analysis indicates impairment, it would be recorded in the period such changes occur based on the fair value of the goodwill and other intangible assets. In 42 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the third quarter 1997, the Company wrote off the remaining Langdon Rieder goodwill of $2.1 million, which has been recorded to amortization expense in the accompanying statement of operations. Income Recognition Real estate commissions on sales are recorded as income upon close of escrow or upon transfer of title. Real estate commissions on leases are generally recorded as income upon the earlier of date of occupancy or cash receipt unless significant future contingencies exist. Realty advisor incentive fees are recognized when earned under the provisions of the related advisory agreements. Other commissions and fees are recorded as income at the time the related services have been performed unless significant future contingencies exist. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Accumulated other comprehensive income consists of foreign currency translation adjustments. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that these estimates provide a reasonable basis for the fair presentation of its financial condition and results of operations. The most significant estimates with regard to these financial statements relate to deferred taxes. New Accounting Pronouncements The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information during the quarter ended December 31, 1998. SFAS 131 requires the use of the "management approach" for segment reporting, which is based on the way the chief operating decision maker organizes segments within a company for making operating decisions and assessing performance. The adoption of this statement did not have a material impact on the Company's financial statements. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-up Activities. SOP 98-5, which is effective for financial statements for fiscal years beginning after December 15, 1998, requires costs of start-up activities and organization costs to be expensed as incurred. The adoption of this statement is not expected to have a material impact on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 43 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1998 and thereafter). SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing of or method of its adoption of SFAS No. 133. Based on derivative instruments outstanding, SFAS No. 133 is not anticipated to have a significant impact on earnings or other components of comprehensive income. Reclassifications Certain reclassifications, which do not have an effect on net income, have been made to the 1997 and 1996 financial statements to conform to the 1998 presentation. 3. Property and Equipment Property and equipment is stated at cost and consists of the following (in thousands):
December 31, ------------------ 1998 1997 -------- -------- Land..................................................... $ 1,822 $ 11,946 Buildings and improvements............................... 20,485 29,312 Furniture and equipment.................................. 106,363 46,066 Equipment under capital leases........................... 12,270 11,916 -------- -------- 140,940 99,240 Accumulated depreciation and amortization................ (82,574) (48,931) -------- -------- Property and equipment, net............................ $ 58,366 $ 50,309 ======== ========
The Company capitalizes expenditures that materially increase the life of the related assets and charges the cost of maintenance and repairs to expense. Upon sale or retirement, the capitalized costs and related accumulated depreciation or amortization are eliminated from the respective accounts, and the resulting gain or loss is included in operating income. Depreciation is computed primarily using the straight-line method over estimated useful lives ranging from 3 to 45 years. Leasehold improvements are amortized over the term of the respective leases, excluding options to renew. Equipment under capital leases is depreciated over the related term of the leases. In 1998, the Company wrote down the carrying value of the Company's headquarters' building to its estimated fair market value and reclassified the property to property held for sale included in other assets. The write-down of $9.0 million was triggered by the Company's decision to sell its building and relocate its headquarters. 44 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Investments in Unconsolidated Subsidiaries Investments in unconsolidated subsidiaries in which the Company does not have majority control are accounted for under the equity method. Investments in and advances to (from) unconsolidated subsidiaries as of December 31, 1998 and 1997 are as follows (in thousands):
December 31, -------------- Interest 1998 1997 -------- ------- ------ KB Opportunity Investors............................ 45% $12,570 $ - CB Commercial/Whittier Partners, LP................. 50 9,691 300 CBRE Pittsburgh..................................... 25 5,822 - KB Investors IV..................................... 45 2,738 - WPI/Koll Asia Pacific Advisors, L.L.C............... 50 247 1,178 Koll Amata.......................................... 46 71 390 Other............................................... * 494 6,090 ------- ------ $31,633 $7,958 ======= ======
- -------- *Various interests with varying ownership rates. Unaudited combined condensed financial information for the entities accounted for using the equity method is as follows (in thousands): Condensed Statement of Operations Information:
December 31, ----------------------- 1998 1997 1996 ------- ------- ------- Net revenue......................................... $72,911 $59,304 $14,195 Income from operations.............................. 27,921 20,398 2,313 Net income.......................................... 23,678 27,618 927
Condensed Balance Sheet Information:
December 31, ---------------- 1998 1997 ------- -------- Current assets............................................. $40,492 $ 47,684 Noncurrent assets.......................................... 45,686 936,527 Current liabilities........................................ 11,123 47,354 Noncurrent liabilities..................................... 20,274 1,169
Equity interest in earnings (losses) of the unconsolidated subsidiaries of $3,443,000, $(113,000) and $145,000 for the years ended December 31, 1998, 1997 and 1996, respectively, have been included in "Operating, administrative and other" on the Consolidated Statements of Operations. 5. Other Assets Included in other assets at December 31, 1998 and 1997 are $2.7 million and $2.1 million, respectively, of investments in limited partnerships managed for a fee for institutional investors. The Company has a 1.0% general partnership interest in each of the limited partnerships which is accounted for under the equity method. Although the Company is the general partner of each limited partnership, it does not have majority control over investment decisions in any of the limited partnerships. Management fee income from the partnerships was approximately $4.7 million, $6.1 million and $7.6 million for the years ended December 31, 1998, 1997, and 45 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1996, respectively. In 1998, several investment properties within the limited partnerships' were sold. The limited partnerships' total assets were approximately $218.4 million and $448.9 million and total liabilities were approximately $130.4 million and $202.4 million as of December 31, 1998, and 1997, respectively. The Company's share of net income (loss) for the years ended December 31, 1998, 1997, and 1996 was not material. The general partner capital contributions for certain partnerships are in the form of unsecured notes payable totaling approximately $0.3 million and $0.8 million at December 31, 1998, and 1997, respectively. (See Note 7) Included in other assets at December 31, 1998 are $8.0 million of property held for sale and $5.3 million of notes receivable from stock option exercises. (See Note 3 and Note 9, respectively) In addition, included in other assets at December 31, 1998 and 1997 was $7.4 million in inventoried property. 6. Employee Benefit Plans Option Plans. A total of 1,000,000 shares of Common Stock have been reserved for issuance under the CB Richard Ellis Services, Inc. 1990 Stock Option Plan. Prior to the Company's November 1996 public offering, options for 1,000,000 shares, at an exercise price of $10.00 per share, were granted pursuant to the plan. In 1996, at the time of the Company's public offering, options for 40,000 shares were granted at an exercise price of $20.00 per share. All options vest over one to four year periods, expiring at various dates through November 2006. During 1998, options to purchase 668,250 shares of Common Stock were exercised. Options for 115,500 shares were outstanding as of December 31, 1998. A total of 600,000 shares of Common Stock have been reserved for issuance under the CB Richard Ellis Services, Inc. 1991 Service Providers Stock Option Plan. In 1991 and 1998 below market options were granted to certain directors as partial payment for director fees. During 1998, options for 152,500 shares were granted to certain directors and executive officers at an exercise price equal to fair market value at date of grant ranging from $33.44 to $38.50 per share. On December 15, 1998 certain holders of a stock option grant with an exercise price in excess of $20.00 per share elected to change the exercise price of their options to $20.00 per share which represented above market value and simultaneously reduce the number of shares by 20%. All options vest over one to five year periods, expiring at various dates through July 2008. Options for 469,567 shares were outstanding as of December 31, 1998. A total of 90,750 shares of Common Stock have been reserved for issuance under the L.J. Melody Acquisition Stock Option Plan, which was adopted by the Board of Directors in September 1996 as part of the July 1996 acquisition of L.J. Melody. Options for all such shares have been issued at an exercise price of $10.00 per share and vest over a period of five years at the rate of five percent per quarter. Options for 90,750 shares of Common Stock were outstanding as of December 31, 1998. In August 1997, in conjunction with the Koll acquisition, the Company approved the assumption of the options outstanding under the KMS (Koll) Holding Company Amended 1994 Stock Option Plan (now known as the CBC Substitute Option Plan ("CBCSP")), the Koll Acquisition Stock Option Plan ("KASOP") and the issuance of warrants. Under the CBCSP, 407,087 stock options were issued with exercise prices ranging from $12.89 to $18.04 in exchange for existing Koll options. These options were immediately exercisable. As of December 31, 1998, 158,072 options have been exercised. Under the KASOP, 550,000 stock options were issued to former senior executives of Koll who became employees or directors of the Company. These options have exercise prices ranging from $20.00 to $36.75 per share and vesting periods ranging from immediate to three years, expiring in April 2007. Options for 480,000 shares were outstanding as of December 31, 1998. 46 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A total of 700,000 shares of Common Stock have been reserved for issuance under the CB Richard Ellis Services, Inc. 1997 Employee Stock Option Plan which was approved by shareholders. In 1997, an option for 40,000 shares, at an exercise price of $23.75, was granted and vests quarterly, expiring in March 2007. Also in 1997, options for 475,500 shares, at an exercise price of $33.50 per share, were granted pursuant to the plan and vest over one to five year periods, expiring in November 2007. During 1998, the Company granted options for 107,500 shares of Common Stock at an exercise price ranging from $33.44 to $36.19 per share. All options were granted at an exercise price equal to fair market value at date of grant. On December 15, 1998 certain holders of a stock option grant with an exercise price in excess of $20.00 per share elected to change the exercise price of their options to $20.00 per share which represented above market value and simultaneously reduce the number of shares by 20%. The vesting periods for these options range from approximately one to five years, expiring at various dates through 2008. Options for 509,800 shares were outstanding as of December 31, 1998. In conjunction with the North Coast Mortgage Company acquisition, an option for 25,000 shares was granted with an exercise price representing the fair market value at date of grant of $32.50. On December 15, 1998 the option holder elected to change the exercise price to $20.00 per share which represented above market value and simultaneously reduce the number of shares by 20%. The option vests over five years at a rate of 20% per year, expiring in February 2008. Options for 20,000 shares were outstanding as of December 31, 1998. In conjunction with the Shoptaw-James acquisition, an option for 25,000 shares was granted with an exercise price representing the fair market value of $37.32 per share. The option vests over five years at a rate of 20% per year, expiring in May 2008. In April 1998, in conjunction with the REI acquisition, the Company approved the assumption of the options outstanding under the REI Limited Stock Option Plan. These options for 46,115 shares of Common Stock were issued and exercised immediately at $14.95 per share in exchange for existing REI options. Also in conjunction with the REI acquisition, the Company granted options for 475,677 shares at an exercise price equal to fair market value at date of grant of $33.50 per share. On December 15, 1998 certain holders of a stock option grant elected to change the exercise price of their options to $20.00 per share which represented above market value and simultaneously reduce the number of shares by 20%. These options vest over three years at a rate of 33.33% per year, expiring in April 2008. Options for 377,486 shares were outstanding as of December 31, 1998. As allowed under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock based compensation plans. Under this method the Company does not recognize compensation expense for options that were granted at the market price of the underlying stock on the date of grant. Had compensation expense been determined consistent with SFAS No. 123, the Company's net income and per share information would have been reduced to the following pro forma amounts (in thousands except per share data):
1998 1997 1996 ------- ------- ------- Net Income: As Reported....................................... $24,557 $24,397 $70,549 Pro Forma......................................... 20,396 21,940 69,932 Basic EPS: As Reported....................................... (0.38) 1.34 5.05 Pro Forma......................................... (0.59) 1.18 5.00 Diluted EPS: As Reported....................................... (0.38) 1.28 4.99 Pro Forma......................................... (0.59) 1.12 4.95
47 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free interest rates of 4.95%, 6.54% and 6.75% for the various plans. Expected volatility for 1998, 1997 and 1996 is 48.16%, 36.67% and 36.67%. Dividend yield is excluded from the calculation since it is the present intention of the Company to retain all earnings for future acquisitions. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the Company believes the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its employee stock options. A summary of the status of the Company's option plans at December 31, 1998, 1997 and 1996 and changes during the years then ended is presented in the table and narrative below:
1998 1997 1996 -------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Stock Options and Exercise Exercise Exercise Warrants Shares Price Shares Price Shares Price ----------------- ---------- -------- --------- -------- --------- -------- Outstanding beginning of the year............... 3,284,381 $22.43 1,116,890 $10.32 996,607 $ 9.65 Granted................. 1,885,944 25.94 2,392,554 26.99 180,750 13.87 Exercised............... (824,385) 10.73 (225,063) 10.78 (10,467) 9.57 Forfeited/Expired....... (1,408,855) 32.42 - - (50,000) 10.00 ---------- ------ --------- ------ --------- ------ Outstanding end of year................... 2,937,085 $23.18 3,284,381 $22.43 1,116,890 $10.32 ---------- ------ --------- ------ --------- ------ Exercisable at end of year................... 830,289 $21.94 1,412,800 $16.08 809,383 $ 9.55 Weighted average fair value of options and warrants granted....... $12.27 $14.27 $ 5.36
Significant option and warrant groups outstanding at December 31, 1998 and related weighted average price and life information is presented below:
Exercisable Options Outstanding Options and Warrants and Warrants ------------------------------------- -------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price --------------- ----------- ---------------- -------- ----------- -------- $00.30-$10.00.... 187,817 4.32 yrs. $ 8.90 132,442 $ 8.43 $12.89-$18.04.... 269,015 6.29 yrs. 14.29 249,015 14.09 $20.00-$23.75.... 1,493,352 8.84 yrs. 20.54 183,032 21.17 $30.00-$37.31.... 986,901 6.82 yrs. 32.30 265,800 36.56 --------- ------ ------- ------ 2,937,085 $23.18 830,289 $21.94 ========= ====== ======= ======
48 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock Purchase Plan. The Company has a restricted stock purchase plan covering certain key employees including senior management. A total of 550,000 shares of Common Stock have been reserved for issuance under the 1996 Equity Incentive Plan of CB Richard Ellis Services, Inc. The shares may be issued to senior executives for a purchase price equal to the greater of $10.00 per share or fair market value. During 1998, the Company sold 25,000 shares and cancelled the issuance of 64,620 shares along with the related promissory notes. The fair market value of shares sold in 1998 was $38.50. Under this plan, 506,286 shares were outstanding as of December 31, 1998. The purchase price for these shares must be paid either in cash or by delivery of a full recourse promissory note. The related promissory notes are also included in stockholders' equity. Bonuses. The Company has bonus programs covering certain key employees, including senior management. Awards are based on the position and performance of the employee and the achievement of pre-established financial, operating and strategic objectives. The amounts charged to expense for bonuses were $33.7 million, $28.8 million and $19.0 million for the years ended December 31, 1998, 1997, and 1996, respectively. Capital Accumulation Plan (the "Cap Plan"). The Cap Plan is a defined contribution profit sharing plan under Section 401(k) of the Internal Revenue Code and is the Company's only such plan. Under the Cap Plan, each participating employee may elect to defer a portion of his or her earnings and the Company may make additional contributions from the Company's current or accumulated net profits to the Cap Plan in such amounts as determined by the Board of Directors. The Company expensed, in connection with the Cap Plan, $2.9 million and $1.9 million for the years ended December 31, 1997, and 1996, respectively. No expense, in connection with the Cap Plan, was incurred for the year ended December 31, 1998. Deferred Compensation Plan (the "DCP"). In 1994 the Company implemented the DCP. Under the DCP, a select group of management and highly compensated employees can defer the payment of all or a portion of their compensation (including any bonus). The DCP permits participating employees to make an irrevocable election at the beginning of each year to receive amounts deferred at a future date either in cash, which accrues at a rate of interest determined in accordance with the DCP and is an unsecured long term liability of the Company, or in newly issued shares of Common Stock of the Company which elections are recorded as additions to Stockholders' Equity. For the twelve months ended December 31, 1998, approximately $10.2 million and $5.4 million were deferred in cash (including interest) and stock, respectively. The accumulated deferrals as of December 31, 1998, were approximately $16.9 million in cash (including interest) and $10.0 million in stock for a total of $26.9 million, all of which was charged to expense in the period of deferral. Pension Plan. The Company, through the acquisition of Hillier Parker, maintains a contributory defined benefit pension plan to provide retirement benefits to former Hillier Parker employees participating in the plan. It is the Company's policy to fund the minimum annual contributions required by applicable regulations. Pension expense recognized totaled $909,000 in 1998. Net periodic pension cost consisted of the following:
1998 -------------- (In thousands) Employer service cost--benefits earned during the year........ $ 2,474 Interest cost on projected benefit obligation................. 2,061 Expected (return) loss on plan assets......................... (3,626) ------- Net periodic pension cost..................................... $ 909 =======
49 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth the plan's funded status and amounts recognized in the accompanying balance sheet:
1998 -------------- (In thousands) Actuarial Value of Benefit Obligations: Vested benefit obligation..................................... $(66,865) Non-vested benefit obligation................................. - -------- Accumulated benefit obligation................................ $(66,865) ======== Projected benefit obligation.................................. $(73,190) Plan assets at fair value..................................... 95,731 -------- Plan assets in excess of projected benefit obligation......... 22,541 Unrecognized net loss......................................... 5,700 -------- Prepaid pension asset included in balance sheet............... $ 28,241 ========
Assumptions used in developing the projected benefit obligation as of December 31 were as follows:
1998 ---- Discount rate used in determining present values....................... 6.00% Annual increase in future compensation levels.......................... 5.50% Expected long-term rate of return on assets............................ 7.75%
Plan assets consist of a diversified portfolio of fixed-income investments and equity securities. 50 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Long-term Debt Long-term debt consists of the following (in thousands):
December 31, ----------------- 1998 1997 -------- -------- Senior Subordinated Notes, less unamortized discount of $2.099 million, with fixed interest at 8.875%.......... $172,901 $ - Revolving Credit Facility, with interest ranging from 6.69% to 8.25%......................................... 167,000 120,000 Westmark Senior Notes, with interest ranging from 10.0% to 12.0% through December 31, 2004 and at variable rates depending on the Company's credit facility rate thereafter, $2.546 million due in 2008, with the remaining balance due in 2010.......................... 16,502 18,861 REI Acquisition Obligations, with interest ranging from 5.1% to 9.5%........................................... 7,575 - Inventoried Property Loan, secured by inventoried property, with interest at short-term commercial paper borrowing rate plus 3.5% (8.3% and 9.1% at December 31, 1998 and 1997, respectively) due in 1999............... 7,093 7,470 REI Senior Notes with variable interest rates based on Sterling LIBOR minus 1.50% due in 2002................. 5,439 - Shoptaw-James Senior Notes, with fixed interest at 9.0%, due from 1999 through 2001............................. 2,430 - Carey, Brumbaugh Senior Notes, with fixed interest at 9.0%, due from 1999 through 2001....................... 2,160 - Koll Acquisition Obligations, with interest ranging up to 9.0%................................................ 1,469 3,843 Other................................................... 3,465 778 -------- -------- Total................................................. 386,034 150,952 Less current maturities............................... 12,343 4,679 -------- -------- Total long-term debt.................................. $373,691 $146,273 ======== ========
Annual aggregate maturities of long-term debt as of December 31, 1998 are as follows (in thousands): 1999--$12,343; 2000--$9,221; 2001--$1,966; 2002-- $5,468; 2003--$167,012 and $190,024 thereafter. In May 1998, the Company amended its revolving credit facility with a bank syndicate to provide a committed line of credit of up to $400.0 million for five years, subject to mandatory reductions of $40.0 million, $80.0 million and $80.0 million on December 31, 1999, 2000 and 2001, respectively. The amount outstanding under this facility was $167.0 million as of December 31, 1998. Interest rate alternatives include Bank of America's reference rate plus 0.50% and LIBOR plus 1.50%. The weighted average rate on amounts outstanding at December 31, 1998 was 6.89%. The revolving credit facility contains numerous restrictive covenants that, among other things, limit the Company's ability to incur or repay other indebtedness, make advances or loans to subsidiaries and other entities, make capital expenditures, incur liens, enter into mergers or effect other fundamental corporate transactions, sell its assets, or declare dividends. In addition, the Company is required to meet certain ratios relating to its adjusted net worth, level of indebtedness, fixed charges and interest coverage. In May 1998, the Company sold $175.0 million of 8.875% Senior Subordinated Notes ("Subordinated Notes") due on June 1, 2006. The Subordinated Notes are redeemable in whole or in part after June 1, 2002 at 104.438% of par on that date and at declining prices thereafter. On or before June 1, 2001, up to 35.0% of the issued amount may be redeemed at 108.875% of par plus accrued interest solely with the proceeds from an equity offering. 51 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Commitments and Contingencies In August 1993, a former commissioned sales person of the Company filed a lawsuit against the Company in the Superior Court of New Jersey, Bergen County, alleging gender discrimination and wrongful termination by the Company. On November 20, 1996, a jury returned a verdict against the Company, awarding $6.5 million in general and punitive damages to the plaintiff. Subsequently, the trial court awarded the plaintiff $638,000 in attorneys' fees and costs. Following denial by the trial court of the Company's motions for new trial, reversal of the verdict and reduction of damages, the Company filed an appeal of the verdict and requested a reduction of damages. On March 9, 1999 the appellate court ruled in the Company's favor, reversed the trial court decision and ordered a new trial. Based on available reserves, cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. In December 1996, GMH Associates, Inc. ("GMH") filed a lawsuit against Prudential Realty Group ("Prudential") and the Company in Superior Court of Pennsylvania, Franklin County, alleging various contractual and tort claims against Prudential, the seller of a large office complex, and the Company, its agent in the sale, contending that Prudential breached its agreement to sell the property to GMH, breached its duty to negotiate in good faith, conspired with the Company to conceal from GMH that Prudential was negotiating to sell the property to another purchaser and that Prudential and the Company misrepresented that there were no other negotiations for the sale of the property. Following a non-jury trial, the court rendered a decision in favor of GMH and against Prudential and the Company, awarding GMH $20.3 million in compensatory damages, against Prudential and the Company jointly and severally, and $10.0 million in punitive damages, allocating the punitive damage award $7.0 million as against Prudential and $3.0 million as against the Company. Following the denial of motions by Prudential and the Company for a new trial, a judgment was entered on December 3, 1998. Prudential and the Company have filed an appeal of the judgment. The Company believes that it has adequate insurance coverage for the compensatory portion of the judgment and adequate reserves for the punitive portion, as well as potential indemnity claims from Prudential for the entire judgment. The Company is a party to a number of pending or threatened lawsuits arising out of, or incident to, its ordinary course of business. Based on available cash and anticipated cash flows, the Company believes that the ultimate outcome will not have an impact on the Company's ability to carry on its operations. Management believes that any liability to the Company that may result from disposition of these lawsuits will not have a material effect on the consolidated financial position or results of operations of the Company. Future minimum rental commitments for noncancelable operating leases at December 31, 1998, are as follows (in thousands): 1999--$33,852; 2000-- $31,126; 2001--$26,977; 2002--$21,867; 2003--$17,106 and $47,221 thereafter. Future minimum lease commitments for noncancelable capital leases at December 31, 1998 are as follows (in thousands): 1999--$3,836; 2000--$1,604; 2001--$827 and 2002--$397. The interest portion of the lease payments totals approximately $1.6 million. Capital lease payments due within one year are classified as current liabilities. Substantially all leases require the Company to pay maintenance costs, insurance and property taxes, and generally may be renewed for five year periods. Total rental expense under noncancelable operating leases was $32.4 million, $24.3 million and $18.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. 52 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Stockholders' Equity In August 1997 in conjunction with the Koll acquisition, the Company approved the issuance of 599,967 warrants. Of the outstanding warrants, 43,644 are attached to Common Stock obtainable under the CBCSP and 556,323 are attached to shares of outstanding Common Stock. Each warrant is exercisable into one share of Common Stock at an exercise price of $30.00 (subject to adjustment) commencing on August 28, 2000 and expiring on August 27, 2004. As of December 31, 1998, 599,967 warrants issued were outstanding. On January 27, 1998 the Company purchased all 4.0 million of its existing convertible preferred shares which could have been converted into approximately 2.56 million common shares, based on the Company's prevailing stock price on that date. The preferred shares carried a dividend requirement of $.25 per share per quarter. The total cost to purchase the preferred shares was $77.4 million, including $5.0 million of previously accrued dividends and certain stock options. The shares were originally issued in conjunction with the Company's acquisition by management in 1989. In 1998, the Company issued 1,328,638 shares of Common Stock in the REI Acquisition, 208,263 shares of Common Stock in the Hillier Parker Acquisition, 25,000 shares to a certain key employee in connection with the 1996 Equity Incentive Plan, 75,064 shares with a stated value of approximately $2.9 million to the Cap Plan for the year ended December 31, 1997 and 824,385 shares in connection with stock option plans. In October 1998, the Company offered all employees under the 1990 Stock Option Plan who hold options that expire in April 1999 a loan equal to 100% of the total exercise price plus 40% of the difference between the current market value of the shares and the exercise price. Loan proceeds were applied towards the total exercise price and payroll withholding taxes. The loans are evidenced by full recourse promissory notes having a maturity of five years at an interest rate of 6.0%. Interest is due annually, while the principal is due the earlier of five years or the sale of the shares. The shares issued under this offering may not be sold until after 18 months from the date of issuance. A total of 405,000 shares were issued under this offering. The related promissory notes of $5.3 million are included in other assets. On October 15, 1998 the Company announced that its board of directors had approved a repurchase program under which it will begin purchasing up to $10.0 million of its common stock during the period of October 16, 1998 through December 31, 1998. The Company purchased 488,900 shares of Common Stock for approximately $8.9 million, cancelled 64,620 shares in connection with the 1996 Equity Incentive Plan and cancelled 34,734 shares under the Omnibus Stock Incentive Plan. 53 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 10. Income Taxes The provisions for income taxes for the years ended December 31, 1998, 1997 and 1996 were computed in accordance with SFAS 109, the modified liability method of accounting for income taxes. The foreign currency translation adjustments included in accumulated other comprehensive income were net of an income tax provision (benefit) of $829,000, $(175,000) and $(5,000) in 1998, 1997 and 1996, respectively. The tax provision (benefit) for the years ended December 31, 1998, 1997 and 1996 excluding the tax impact on extraordinary items of $0.7 million, consisted of the following (in thousands):
Year Ended December 31, -------------------------- 1998 1997 1996 ------- ------- -------- Federal: Current....................................... $ 4,265 $ 1,243 $ 730 Deferred tax.................................. 14,469 17,436 9,522 Reduction of valuation allowances............. - - (55,900) ------- ------- -------- 18,734 18,679 (45,648) State: Current....................................... 3,470 2,193 658 Deferred tax.................................. (75) (314) 250 ------- ------- -------- 3,395 1,879 908 Foreign......................................... 3,797 - - ------- ------- -------- $25,926 $20,558 $(44,740) ======= ======= ========
The following is a reconciliation, stated as a percentage of pre-tax income, of the U.S. statutory federal income tax rate to the Company's effective tax rate on income from operations:
Year Ended December 31, ---------------- 1998 1997 1996 ---- ---- ---- Federal statutory tax rate................................ 35% 35% 35% Permanent differences, including goodwill, meals and entertainment............................................ 8 7 5 State taxes, net of federal benefit....................... 4 2 4 Foreign income taxes...................................... 4 - - Reduction of valuation allowances and other............... - 1 (217) --- --- ---- Effective tax rate........................................ 51% 45% (173)% === === ====
54 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Beginning in 1992, the Company implemented SFAS No. 109, the modified liability method of accounting for income taxes. Until the third quarter of 1996, the resulting net deferred tax asset had been fully reserved. Cumulative tax effects of temporary differences are shown below as of December 31, 1998 and 1997 (in thousands):
Year Ended December 31, ----------------------- 1998 1997 -------- -------- Asset (Liability) Property and equipment............................. $ 4,325 $ 1,272 Reserves for bad debts, building write down, legal expenses.......................................... 16,410 14,849 Intangible amortization............................ (14,998) (11,418) Bonus, unexercised restricted stock, deferred compensation...................................... 13,282 6,820 Partnership income................................. 4,877 4,778 Net operating loss and alternative minimum tax credit carryforwards.............................. 28,049 49,003 Unconsolidated affiliates.......................... (141) (173) All other, net..................................... 1,492 2,627 -------- -------- Net deferred tax asset before valuation allowances........................................ 53,296 67,758 Valuation allowances............................... (26,667) (29,901) -------- -------- Net deferred tax asset........................... $ 26,629 $ 37,857 ======== ========
A deferred U.S. tax liability has not been provided on the unremitted earnings of foreign subsidiaries because it is the intent of the Company to permanently reinvest such earnings. Undistributed earnings of foreign subsidiaries, which have been or intended to be permanently invested in accordance with Accounting Principles Board ("APB") No. 23, Accounting for Income Taxes--Special Areas, paragraph 12, aggregated $5.9 million at December 31, 1998. During 1996, the Company projected, on a more likely than not basis, that a portion of its NOL would be realizable in future periods and, accordingly, reduced its existing deferred tax asset valuation allowances by $61.2 million of which $5.3 million has been allocated to the purchase price of L.J. Melody based on its estimated future potential to generate taxable income, and the remaining $55.9 million has been recorded as a tax benefit (a reduction in income tax provision). With the recognition of deferred tax assets, the future period provisions for income tax will be recorded at the full effective tax rate excluding the impact of other adjustments, if any, to valuation allowances. 11. Per Share Information Basic earnings (loss) per share was computed by dividing net income, less preferred dividend requirements as applicable, by the weighted average number of common shares outstanding during each period. The computation of diluted earnings (loss) per share further assumes the dilutive effect of stock options, stock warrants and, during periods when preferred stock was outstanding and was dilutive, the conversion of the preferred stock. When the Company is in a net loss position for a particular reporting period, the stock options and warrants outstanding are excluded as they are anti-dilutive. In January 1998 the Company repurchased all 4.0 million of its existing convertible preferred stock. The portion of the purchase price in excess of the carrying value represents the deemed dividend charge to net income applicable to common shareholders when computing basic and dilutive earnings (loss) per share. 55 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following is a calculation of earnings (loss) per share for the years ended December 31 (in thousands, except share and per share data):
1998 1997 1996 --------------------------- -------------------------- -------------------------- Per- Per- Per- Share Share Share Income Shares Amount Income Share Amount Income Shares Amount -------- ---------- ------ ------- ---------- ------ ------- ---------- ------ Bank earnings (loss) per share Net income before extraordinary items... $ 24,557 $25,348 $70,549 Deemed dividend on preferred stock repurchase............ (32,273) - - Preferred stock dividends............. - (4,000) (1,000) -------- ------- ------- Income before extraordinary items applicable to common shareholders.......... (7,716) 20,136,117 $(0.38) 21,348 15,237,914 $ 1.40 69,549 13,783,882 $5.05 Extraordinary items, net................... - - (951) (0.06) - - -------- ------ ------- ------ ------- ----- Income (loss) applicable to common shareholders.......... $ (7,716) $(0.38) $20,397 $ 1.34 $69,549 $5.05 ======== ====== ======= ====== ======= ===== Diluted earnings (loss) per share Income (loss) before extraordinary items applicable to common shareholders.......... $ (7,716) 20,136,117 $21,348 15,237,914 $70,549 13,783,882 Diluted effect of exercise of options outstanding........... - - 759,015 61,443 Diluted effect of convertible preferred stock................. - - - 281,311 -------- ---------- ------- ---------- ------- ---------- Income (loss) before extraordinary items applicable to common shareholders.......... (7,716) 20,136,117 $(0.38) 21,348 15,996,929 $ 1.34 70,549 14,126,636 $4.99 Extraordinary items, net................... - - (951) (0.06) - - -------- ------ ------- ------ ------- ----- Income (loss) applicable to common shareholders.......... $ (7,716) $(0.38) $20,397 $ 1.28 $70,549 $4.99 ======== ====== ======= ====== ======= =====
The following items were not included in the computation of diluted earnings per share because their effect in the aggregate was anti-dilutive for the years ended December 31:
1998 1997 1996 --------------- ---------------- ----------------- Stock options Outstanding............... 2,337,118 845,500 70,000 Price ranges.............. $0.30-$37.31 $31.00-$36.75 $20.00 Expiration ranges......... 4/18/99-7/22/08 4/21/07-11/17/07 11/24/06-11/25/06 Stock warrants Outstanding............... 599,967 599,967 - Price ranges.............. $30.00 $30.00 - Expiration................ 8/28/04 8/28/04 - Convertible preferred shares Number of common shares at the applicable conversion ratio.................... - 2,400,000 -
12. Fiduciary Funds The consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which amounted to $201.6 million and $186.8 million at December 31, 1998 and 1997, respectively. 56 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. Disclosures About Fair Value of Financial Instruments Notes Receivable. The Company has determined that it is not practicable to estimate the fair value of the notes receivable amounting to $1.7 million at both December 31, 1998 and 1997, due to the cost involved in developing the information as such notes are not publicly traded. Based on dealer's quote, the estimated fair value of the Company's $175.0 million Senior Subordinated Note, as discussed in Note 7, is $177.2 million. The fair value of the Inventoried Property Loan discussed in Note 7 is not materially different from the carrying value of the debt. Estimated fair values for the Revolving Credit Facilities and the remaining long-term debts are not presented because the Company believes that it is not materially different from book value, primarily because the majority of the Company's debt is based on variable rates. 57 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Industry Segments The Company provides integrated real estate services through four global business units. The four units are Brokerage Services, Corporate Services, Asset Services and Financial Services. The factors for determining the reportable segments were based on the type of service and client. Each business segment requires and is responsible for executing a unique marketing and business strategy. Brokerage Services consists of commercial property sales and leasing services. Corporate Services consists of outsourcing, transaction management, advisory services and facilities management. Asset Services consists of property management and related services. Financial Services consists of investment property services (acquisitions and sales on behalf of investors), mortgage loan origination and servicing through L.J. Melody, investment management and advisory services through CB Richard Ellis Investors L.L.C. ("CBRE Investors"), capital markets activities, valuation and appraisal services and real estate market research. The following tables summarize the revenue, cost and expenses, and operating income by operating segment for the years ended December 31, 1998, 1997 and 1996.
Year Ended December 31, ------------------------------ 1998 1997 1996 ---------- -------- -------- (Dollars in thousands) Revenue Brokerage Services............................. $ 546,361 $423,485 $345,906 Corporate Services............................. 78,671 37,608 25,564 Asset Services................................. 126,322 67,442 44,783 Financial Services............................. 283,149 201,689 166,815 ---------- -------- -------- $1,034,503 $730,224 $583,068 ========== ======== ======== Operating income Brokerage Services............................. $ 61,908 $ 43,927 $ 24,139 Corporate Services............................. 1,459 1,588 335 Asset Services................................. 9,231 4,547 5,149 Financial Services............................. 22,463 21,950 18,806 Merger-related and other nonrecurring costs.... (16,585) (12,924) - ---------- -------- -------- 78,476 59,088 48,429 Interest income.................................. 3,054 2,598 1,503 Interest expense................................. 31,047 15,780 24,123 ---------- -------- -------- Income before provision for income taxes......... $ 50,483 $ 45,906 $ 25,809 ========== ======== ======== Depreciation and amortization Brokerage Services............................. $ 10,820 $ 8,200 $ 7,092 Corporate Services............................. 2,491 898 243 Asset Services................................. 5,870 2,040 700 Financial Services............................. 13,004 6,922 5,539 ---------- -------- -------- $ 32,185 $ 18,060 $ 13,574 ========== ======== ======== Capital expenditures Brokerage Services............................. $ 18,602 $ 6,678 $ 2,372 Corporate Services............................. 1,992 537 87 Asset Services................................. 4,854 1,492 209 Financial Services............................. 4,267 1,220 334 ---------- -------- -------- $ 29,715 $ 9,927 $ 3,002 ========== ======== ========
58 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, ------------------ 1998 1997 1996 ------ ----- ---- (Dollars in thousands) Equity interest in earnings (losses) of unconsolidated subsidiaries Brokerage Services....................................... $ 316 $ 596 $145 Corporate Services....................................... - (298) - Asset Services........................................... 2,422 (204) - Financial Services....................................... 705 (207) - ------ ----- ---- $3,443 $(113) $145 ====== ===== ====
As of December 31, ----------------------- 1998 1997 ----------- ----------- (Dollars in thousands) Identifiable assets Brokerage Services.................................... $ 162,907 $ 64,363 Corporate Services.................................... 113,123 72,189 Asset Services........................................ 241,838 131,285 Financial Services.................................... 276,603 122,757 Corporate............................................. 62,421 109,506 ----------- ----------- $ 856,892 $ 500,100 =========== ===========
Identifiable assets by industry segment are those assets used in the Company operations in each segment. Corporate identified assets are principally made up of cash and cash equivalents, inventoried property, general prepaids and deferred taxes.
As of December 31, ----------------------- 1998 1997 ----------- ----------- (Dollars in thousands) Investment in and advances to unconsolidated subsidiaries Brokerage Services................................... $ 6,206 $ 972 Corporate Services................................... - 2,021 Asset Services....................................... 10,061 2,982 Financial Services................................... 15,366 1,983 ----------- ---------- $31,633 $7,958 =========== ==========
59 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Geographic Information
Year Ended December, ------------------------------ 1998 1997 1996 ---------- --------- --------- (Dollars in thousands) Revenue United States.................................. $ 884,304 $ 730,224 $ 583,068 All other countries............................ 150,199 -- -- ---------- --------- --------- $1,034,503 $ 730,224 $ 583,068 ========== ========= =========
As of December 31, ----------------------- 1998 1997 ----------- ----------- (Dollars in thousands) Long-Lived Assets United States......................................... $ 56,973 $ 57,664 All other countries................................... 16,748 -- ----------- ----------- $ 73,721 $ 57,664 =========== ===========
Long-lived assets are principally made up of property, plant and equipment, property held for sale and inventoried property. 60 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
Reserve for Allowance Employee for Bad Legal Other Loans Debts Reserve Reserves ----------- --------- ------- -------- Balance, December 31, 1995............. $1,535 $ 4,400 $ 3,455 $ - Charges to expense................... 600 1,257 7,686 - Write-offs, payments and other....... (425) (1,234) (1,820) - ------ ------- ------- ------- Balance, December 31, 1996............. 1,710 4,423 9,321 - Koll balance at the date of acquisition......................... - 4,401 - 7,916 Charges to expense................... - 1,226 1,195 2,951 Write-offs, payments and other....... (893) (1,070) (709) (2,576) ------ ------- ------- ------- Balance, December 31, 1997............. 817 8,980 9,807 8,291 CB Canada balances at the date of acquisition......................... - 606 - - REI balances at the date of acquisition......................... 256 2,211 - - Hillier Parker balances at the date of acquisition...................... 421 895 72 13,360 Charges to expense................... 364 2,978 1,843 - Write-offs, payments and other....... (381) (2,322) (1,623) (5,677) ------ ------- ------- ------- Balance, December 31, 1998............. $1,477 $13,348 $10,099 $15,974 ====== ======= ======= =======
61 EXHIBIT 12 CB RICHARD ELLIS SERVICES, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS FOR THE FIVE YEARS ENDED DECEMBER 31, 1998 (Dollars in thousands)
1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Pre-tax income (loss) from continuing operations............................ $50,483 $45,906 $25,809 $ 8,250 $ 9,325 Fixed Charges........................ 41,854 22,884 30,629 29,172 23,283 ------- ------- ------- ------- ------- Total earnings (loss) before fixed charges............................... $92,337 $68,790 $56,438 $37,422 $32,608 ======= ======= ======= ======= ======= Fixed Charges Portion of rent expense representative of the interest factor(1).................. $10,807 $ 7,104 $ 6,506 $ 5,905 $ 5,921 Interest expense..................... 31,047 15,780 24,123 23,267 17,362 Preferred stock dividends(2)......... - 6,557 1,639 - - ------- ------- ------- ------- ------- Total fixed charges and preferred dividends........................... $41,854 $29,441 $32,268 $29,172 $23,283 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges and preferred dividends................... 2.21 2.34 1.75 1.28 1.40 ======= ======= ======= ======= =======
- -------- (1) Represents one-third of operating lease costs which approximates the portion that relates to the interest portion. (2) Preferred stock dividend requirements have been reflected at their pre-tax amounts. The 1998 amount does not reflect the deemed dividend associated with the Company's repurchase of preferred stock of $32.3 million. In computing the ratio of earnings to fixed charges; (a) earnings have been based on income from continuing operations before income taxes, extraordinary items and fixed charges (exclusive of interest capitalized) and (b) fixed charges consist of interest and amortization of debt discount and expense (including amounts capitalized) and the estimated interest portion of rents. 62 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company expects to file with the Securities and Exchange Commission its definitive proxy statement concerning its 1999 Annual Meeting of Stockholders (the "1999 Annual Meeting Proxy Statement") no later than 120 days after December 31, 1999. The information required by this item is set forth in the 1999 Annual Meeting Proxy Statement under the headings "Nomination and Election of Directors---Directors and Nominees for Directors," "Nomination and Election of Directors---Management" and "Nomination and Election of Directors---Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth in the 1999 Annual Meeting Proxy Statement under the headings "Nomination and Election of Directors---Directors Fees" and "Nomination and Election of Directors---Executive Compensation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth in the 1999 Annual Meeting Proxy Statement under the heading "Nomination and Election of Directors---Principal Stockholders" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth in the 1999 Annual Meeting Proxy Statement under the heading "Nomination and Election of Directors---Certain Relationships and Related Transactions" and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements See Index to Consolidated Financial Statements set forth on page 33. 2. Financial Statement Schedules See Index to Consolidated Financial Statements set forth on page 33. 3. Exhibits 63 EXHIBIT INDEX
Exhibit Number Description of Exhibit ------- ---------------------- 2.1* Agreement and Plan of Reorganization dated as of May 13, 1997 by and among CB Commercial Real Estate Services Group, Inc. (the "Company"), CBC Acquisition Corporation, Koll Real Estate Services, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company and certain individual signatories thereto, filed as Annex 1 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 2.2* Offer Document dated February 7, 1998 from the Company to the Shareholders of REI Limited, filed as Exhibit 2 to the Company's Form S-3 Registration Statement (File No. 333-48875) 2.3* Form of Offer by the Partners of Hillier Parker May & Rowden for the Entire Business of the Partnership to CB Hillier Parker Ltd., filed as Exhibit 2 to the Company's Current Report on Form 8-K dated July 7, 1998 3.1* Fifth Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1(i) to the Company's Form 8-K dated May 20, 1998 3.2 Fifth Amended and Restated Bylaws of the Company 4.1* Specimen Form of Common Stock Certificate, filed as Exhibit 4.1 to the Company's Form S-1 Registration Statement (File No. 333-12757) 4.2* Form of the Company's Restricted Stock Agreement between the Company and the Company's Officer or Employee, filed as Exhibit 4.8 to the Company's Form S-1 Registration Statement (File No. 33-29410) 4.3* First Amendment to the Company's Restricted Stock Agreement, filed as Exhibit 4.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989 4.4* Form of Warrant Agreement between the Company, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company and certain individuals, with attached Form of Warrant Certificate, filed as Annex 2 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 4.5* First Supplemental Indenture between CB Richard Ellis Services, Inc. and State Street Bank and Trust Company of California, N.A., as Trustee, dated as of May 26, 1998 for 8 7/8 percent Senior Subordinated Notes due 2008 ("Subordinated Notes"), filed as Exhibit 4.1 to the Company's Form 8-K dated May 20, 1998; and Form of Indenture relating to the Subordinated Notes was filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (File No. 333-48875) 10.1(i)*+ CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.13 to Post-Effective Amendment No. 1 to the Company's Form S-1 Registration Statement (File No. 33-29410) 10.1(ii)*+ First Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 10.1(iii)*+ Second Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 10.1(iv)*+ Third Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.4(iv) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994
64 EXHIBIT INDEX--(Continued)
Exhibit Number Description of Exhibit ------- ---------------------- 10.2(i)*+ 1990 Stock Option Plan, filed as Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990 10.2(ii)*+ First Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.15(ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 10.2(iii)*+ Second Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.8(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 10.2(iv)*+ Third Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.5(iv) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 10.3+ CB Richard Ellis Services, Inc. Amended and Restated Annual Management Bonus Plan 10.4(i)*+ CB Commercial Real Estate Services Group, Inc. 1991 Service Providers Stock Option Plan, filed as Exhibit 10.27 to the Company's Current Report on Form 8-K dated April 1, 1992 10.4(ii)*+ 1997 Amendment to the 1991 Service Providers Stock Option Plan, filed as Annex 7 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.5(i)*+ CB Commercial Real Estate Services Group, Inc. Amended and Restated Deferred Compensation Plan, filed as Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1997 10.5(ii)*+ Amendment to the Amended and Restated Deferred Compensation Plan (effective December 1, 1997) filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 10.6*+ Amended and Restated 1996 Equity Incentive Plan of CB Commercial Real Estate Services Group, Inc., filed as Annex 8 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333-28731) 10.7*+ CB Commercial Real Estate Services Group, Inc. L.J. Melody Acquisition Stock Option Plan, filed as Exhibit 10.10 to the Company's Form 10-K for the year ended December 31, 1996 10.8*+ Form of Indemnification Agreement between the Company, CB Commercial Real Estate Group, Inc. and directors and officers, filed as Exhibit 10.29 to the Company's Annual Report on Form 10- K for the year ended December 31, 1992 10.9*+ Employment Agreement between the Company and Lawrence J. Melody dated July 1, 1996, filed as Exhibit 10.12 to the Company's Form S-1 Registration Statement (File No. 333-12757) 10.10*+ CB Commercial Real Estate Services Group, Inc. 1997 Employee Stock Option Plan, filed as Annex 5 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.11*+ CB Commercial Real Estate Services Group, Inc. Koll Acquisition Stock Option Plan, filed as Exhibit 10.13 to the Company's Form 10-K for the year ended December 31, 1997 10.12(i)*+ CB Commercial Real Estate Services Group, Inc. / KMS Holding Corporation Amended 1994 Nonqualified Performance Stock Option Plan, filed as Exhibit 10.14(i) to the Company's Form 10-K for the year ended December 31, 1997 10.12(ii)*+ Form of Nonstatutory Stock Option Agreement evidencing substitute options granted by the Company upon assumption of options issued under the KMS Holding Corporation Amended 1994 Stock Option Plan, filed as Exhibit 10.14(ii) to the Company's Form 10-K for the year ended December 31, 1997
65 EXHIBIT INDEX--(Continued)
Exhibit Number Description of Exhibit ------- ---------------------- 10.13*+ Consulting Agreement dated July 16, 1997 between CB Commercial Real Estate Group, Inc. and Donald M. Koll, filed as Exhibit 10.15 to the Company's Form 10-K for the year ended December 31, 1997 10.14*+ Employment Agreement dated May 23, 1997 between the Company and James J. Didion, filed as Exhibit 10(iii)(17) to the Company's Registration Statement on Form S-4 Amendment No. 1 (File No. 333- 28731) 10.15* Registration Rights Agreement by and among the Company, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company, Raymond E. Wirta and William S. Rothe, Jr. dated as of May 14, 1997, filed as Exhibit 10(i)(3) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.16*+ Noncompetition and Confidentiality Agreement by and among the Company, CBC Acquisition Corporation, Koll Real Estate Services, Donald M. Koll and The Koll Holding Company dated May 14, 1997, filed as Exhibit 10(i)(4) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.17*+ Noncompetition and Confidentiality Agreement by and among the Company, Koll Real Estate Services, and William S. Rothe dated as of May 14, 1997, filed as Exhibit 10(i)(5) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.18*+ Noncompetition and Confidentiality Agreement by and among the Company, Koll Real Estate Services, and Raymond E. Wirta dated as of May 14, 1997, filed as Exhibit 10(i)(6) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.19*+ Employment Agreement by and between the Company and William Rothe dated as of May 14, 1997, filed as Exhibit 10(iii)(1) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.20(i)* Credit Agreement dated as of August 28, 1997 by and among the Company; Bank of America NT & SA; The Sumitomo Bank, Limited; Wells Fargo Bank, N.A.; BHF-Bank Aktiengeselleshaft; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch and Grand Cayman Branch; Key Bank National Association; and other financial institutions, filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1997 10.20(ii)* Amendment No. 1 dated as of January 21, 1998, to the Credit Agreement dated as of August 28, 1997 by and among the Company; Bank of America NT & SA; The Sumitomo Bank, Limited; Wells Fargo Bank, N.A.; BHF-Bank Aktiengeselleshaft; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch and Grand Cayman Branch; Key Bank National Association; and other financial institutions, filed as Exhibit 10.22(ii) to the Company's Form 10-K for the year ended December 31, 1997 10.20(iii)* Amended and Restated Credit Agreement dated May 20, 1998 among CB Richard Ellis Services, Inc.; Wells Fargo Bank, N.A., The Bank of Nova Scotia; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch; Keybank National Association; The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency; and other financial institutions party to the agreement is filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1998 10.20(iv)* Amendment No. 1 to the Amended and Restated Credit Agreement dated May 20, 1998 among CB Richard Ellis Services, Inc.; Wells Fargo Bank, N.A., The Bank of Nova Scotia; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch; Keybank National Association; The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency; and other financial institutions party to the agreement is filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1998
66 EXHIBIT INDEX--(Continued)
Exhibit Number Description of Exhibit ------- ---------------------- 10.21* Form of amendment to the Company's 1990 Stock Option Plan, the 1991 Service Providers Stock Option Plan, the L.J. Melody Acquisition Stock Option Plan, and the Koll Acquisition Stock Option Plan, filed as Exhibit 10.23 to the Company's Form 10-K for the year ended December 31, 1997 10.22(i)* Purchase Agreement dated as of May 15, 1995 among CB Commercial Real Estate Group, Inc., Westmark Real Estate Acquisition Partnership, L.P., and certain individuals signatory thereto, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 30, 1995 10.22(ii)* Form of SPP Purchase Agreement by and among Westmark Real Estate Acquisition Partnership, L.P., CB Commercial Real Estate Group, Inc. and certain individuals, dated as of August 15, 1997, filed as Exhibit 10.24(ii) to the Company's Form 10-K for the year ended December 31, 1997 10.23+ Amended and Restated Employment Agreement by and between the Company and James J. Didion entered into as of March 3, 1999. 11 Statement concerning Computation of Per Share Earnings (filed as Note 11 of the Consolidated Financial Statements) 12 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends (filed as a Schedule Supporting the Consolidated Financial Statements--see Index to Consolidated Financial Statements) 21 Subsidiaries of the Company 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (filed only with the SEC)
- -------- *Incorporated by reference +Management contract or compensatory plan required by Item 601 of Regulation S-K (b) Reports on Form 8-K 1. The registrant filed a Current Report on Form 8-K dated October 15, 1998 (i) discussing the recent decline of the Company's common stock price and related investment community concerns and (ii) announcing that the Company's Board of Directors approved a stock repurchase program under which the Company will begin purchasing up to $10.0 million of its common stock during the period beginning October 16, 1998 through December 31, 1998. 2. The registrant filed a Current Report on Form 8-K dated September 22, 1998 (i) announcing the completion of the Company's acquisition of the 73.0% of CB Commercial Real Estate Group Canada, Inc. which it did not previously own and (ii) announcing completion of the Company's purchase of the remaining ownership interests in the Richard Ellis Australia and New Zealand businesses that it did not already own on October 2, 1998. 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CB RICHARD ELLIS SERVICES, INC. (Registrant) /s/ James J. Didion By: _________________________________ James J. Didion Chairman of the Board and Chief Executive Officer Date: February 23, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ James J. Didion Chief Executive Officer and February 23, 1999 ____________________________________ Director James J. Didion /s/ John C. Haeckel Senior Executive Vice February 23, 1999 ____________________________________ President, Chief Financial John C. Haeckel Officer and Treasurer /s/ Debra L. Morris Executive Vice President and February 23, 1999 ____________________________________ Global Chief Accounting Debra L. Morris Officer (Principal Accounting Officer) /s/ Stanton D. Anderson Director February 23, 1999 ____________________________________ Stanton D. Anderson /s/ Gary J. Beban Director February 23, 1999 ____________________________________ Gary J. Beban /s/ Richard C. Blum Director February 23, 1999 ____________________________________ Richard C. Blum Director February , 1999 ____________________________________ Bradford M. Freeman /s/ Donald M. Koll Director February 23, 1999 ____________________________________ Donald M. Koll
68
Signature Title Date --------- ----- ---- /s/ Paul C. Leach Director February 23, 1999 ____________________________________ Paul C. Leach Director February , 1999 ____________________________________ Frederic V. Malek /s/ Peter V. Ueberroth Director February 23, 1999 ____________________________________ Peter V. Ueberroth /s/ Ray Elizabeth Uttenhove Director February 23, 1999 ____________________________________ Ray Elizabeth Uttenhove /s/ W. Brett White Director February 23, 1999 ____________________________________ W. Brett White Director February , 1999 ____________________________________ Gary L. Wilson /s/ Raymond E. Wirta Director February 23, 1999 ____________________________________ Raymond E. Wirta
69 EXHIBIT INDEX
Exhibit Number Description of Exhibit ------- ---------------------- 2.1* Agreement and Plan of Reorganization dated as of May 13, 1997 by and among CB Commercial Real Estate Services Group, Inc. (the "Company"), CBC Acquisition Corporation, Koll Real Estate Services, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company and certain individual signatories thereto, filed as Annex 1 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 2.2* Offer Document dated February 7, 1998 from the Company to the Shareholders of REI Limited, filed as Exhibit 2 to the Company's Form S-3 Registration Statement (File No. 333-48875) 2.3* Form of Offer by the Partners of Hillier Parker May & Rowden for the Entire Business of the Partnership to CB Hillier Parker Ltd., filed as Exhibit 2 to the Company's Current Report on Form 8-K dated July 7, 1998 3.1* Fifth Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1(i) to the Company's Form 8-K dated May 20, 1998 3.2 Fifth Amended and Restated Bylaws of the Company 4.1* Specimen Form of Common Stock Certificate, filed as Exhibit 4.1 to the Company's Form S-1 Registration Statement (File No. 333-12757) 4.2* Form of the Company's Restricted Stock Agreement between the Company and the Company's Officer or Employee, filed as Exhibit 4.8 to the Company's Form S-1 Registration Statement (File No. 33-29410) 4.3* First Amendment to the Company's Restricted Stock Agreement, filed as Exhibit 4.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989 4.4* Form of Warrant Agreement between the Company, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company and certain individuals, with attached Form of Warrant Certificate, filed as Annex 2 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 4.5* First Supplemental Indenture between CB Richard Ellis Services, Inc. and State Street Bank and Trust Company of California, N.A., as Trustee, dated as of May 26, 1998 for 8 7/8 percent Senior Subordinated Notes due 2008 ("Subordinated Notes"), filed as Exhibit 4.1 to the Company's Form 8-K dated May 20, 1998; and Form of Indenture relating to the Subordinated Notes was filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (File No. 333-48875) 10.1(i)*+ CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.13 to Post-Effective Amendment No. 1 to the Company's Form S-1 Registration Statement (File No. 33-29410) 10.1(ii)*+ First Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 10.1(iii)*+ Second Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.16(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 10.1(iv)*+ Third Amendment to the CB Commercial Real Estate Services Group, Inc. Omnibus Stock and Incentive Plan, filed as Exhibit 10.4(iv) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994
EXHIBIT INDEX--(Continued)
Exhibit Number Description of Exhibit ------- ---------------------- 10.2(i)*+ 1990 Stock Option Plan, filed as Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990 10.2(ii)*+ First Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.15(ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 10.2(iii)*+ Second Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.8(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 10.2(iv)*+ Third Amendment to the 1990 Stock Option Plan, filed as Exhibit 10.5(iv) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 10.3+ CB Richard Ellis Services, Inc. Amended and Restated Annual Management Bonus Plan 10.4(i)*+ CB Commercial Real Estate Services Group, Inc. 1991 Service Providers Stock Option Plan, filed as Exhibit 10.27 to the Company's Current Report on Form 8-K dated April 1, 1992 10.4(ii)*+ 1997 Amendment to the 1991 Service Providers Stock Option Plan, filed as Annex 7 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.5(i)*+ CB Commercial Real Estate Services Group, Inc. Amended and Restated Deferred Compensation Plan, filed as Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1997 10.5(ii)*+ Amendment to the Amended and Restated Deferred Compensation Plan (effective December 1, 1997) filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 10.6*+ Amended and Restated 1996 Equity Incentive Plan of CB Commercial Real Estate Services Group, Inc., filed as Annex 8 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333-28731) 10.7*+ CB Commercial Real Estate Services Group, Inc. L.J. Melody Acquisition Stock Option Plan, filed as Exhibit 10.10 to the Company's Form 10-K for the year ended December 31, 1996 10.8*+ Form of Indemnification Agreement between the Company, CB Commercial Real Estate Group, Inc. and directors and officers, filed as Exhibit 10.29 to the Company's Annual Report on Form 10- K for the year ended December 31, 1992 10.9*+ Employment Agreement between the Company and Lawrence J. Melody dated July 1, 1996, filed as Exhibit 10.12 to the Company's Form S-1 Registration Statement (File No. 333-12757) 10.10*+ CB Commercial Real Estate Services Group, Inc. 1997 Employee Stock Option Plan, filed as Annex 5 to the Company's definitive proxy statement/prospectus dated July 31, 1997 as part of the Company's Registration Statement on Form S-4 Amendment No. 4 (File No. 333- 28731) 10.11*+ CB Commercial Real Estate Services Group, Inc. Koll Acquisition Stock Option Plan, filed as Exhibit 10.13 to the Company's Form 10-K for the year ended December 31, 1997 10.12(i)*+ CB Commercial Real Estate Services Group, Inc. / KMS Holding Corporation Amended 1994 Nonqualified Performance Stock Option Plan, filed as Exhibit 10.14(i) to the Company's Form 10-K for the year ended December 31, 1997 10.12(ii)*+ Form of Nonstatutory Stock Option Agreement evidencing substitute options granted by the Company upon assumption of options issued under the KMS Holding Corporation Amended 1994 Stock Option Plan, filed as Exhibit 10.14(ii) to the Company's Form 10-K for the year ended December 31, 1997
EXHIBIT INDEX--(Continued)
Exhibit Number Description of Exhibit ------- ---------------------- 10.13*+ Consulting Agreement dated July 16, 1997 between CB Commercial Real Estate Group, Inc. and Donald M. Koll, filed as Exhibit 10.15 to the Company's Form 10-K for the year ended December 31, 1997 10.14*+ Employment Agreement dated May 23, 1997 between the Company and James J. Didion, filed as Exhibit 10(iii)(17) to the Company's Registration Statement on Form S-4 Amendment No. 1 (File No. 333- 28731) 10.15* Registration Rights Agreement by and among the Company, FS Equity Partners III, L.P., FS Equity Partners International, L.P., AP KMS Partners, L.P., AP KMS II, LLC, The Koll Holding Company, Raymond E. Wirta and William S. Rothe, Jr. dated as of May 14, 1997, filed as Exhibit 10(i)(3) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.16*+ Noncompetition and Confidentiality Agreement by and among the Company, CBC Acquisition Corporation, Koll Real Estate Services, Donald M. Koll and The Koll Holding Company dated May 14, 1997, filed as Exhibit 10(i)(4) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.17*+ Noncompetition and Confidentiality Agreement by and among the Company, Koll Real Estate Services, and William S. Rothe dated as of May 14, 1997, filed as Exhibit 10(i)(5) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.18*+ Noncompetition and Confidentiality Agreement by and among the Company, Koll Real Estate Services, and Raymond E. Wirta dated as of May 14, 1997, filed as Exhibit 10(i)(6) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.19*+ Employment Agreement by and between the Company and William Rothe dated as of May 14, 1997, filed as Exhibit 10(iii)(1) to the Company's Registration Statement on Form S-4 (File No. 333-28731) 10.20(i)* Credit Agreement dated as of August 28, 1997 by and among the Company; Bank of America NT & SA; The Sumitomo Bank, Limited; Wells Fargo Bank, N.A.; BHF-Bank Aktiengeselleshaft; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch and Grand Cayman Branch; Key Bank National Association; and other financial institutions, filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1997 10.20(ii)* Amendment No. 1 dated as of January 21, 1998, to the Credit Agreement dated as of August 28, 1997 by and among the Company; Bank of America NT & SA; The Sumitomo Bank, Limited; Wells Fargo Bank, N.A.; BHF-Bank Aktiengeselleshaft; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch and Grand Cayman Branch; Key Bank National Association; and other financial institutions, filed as Exhibit 10.22(ii) to the Company's Form 10-K for the year ended December 31, 1997 10.20(iii)* Amended and Restated Credit Agreement dated May 20, 1998 among CB Richard Ellis Services, Inc.; Wells Fargo Bank, N.A., The Bank of Nova Scotia; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch; Keybank National Association; The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency; and other financial institutions party to the agreement is filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1998 10.20(iv)* Amendment No. 1 to the Amended and Restated Credit Agreement dated May 20, 1998 among CB Richard Ellis Services, Inc.; Wells Fargo Bank, N.A., The Bank of Nova Scotia; Credit Lyonnais Los Angeles Branch; Dresdner Bank AG, New York Branch; Keybank National Association; The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency; and other financial institutions party to the agreement is filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1998
EXHIBIT INDEX--(Continued)
Exhibit Number Description of Exhibit ------- ---------------------- 10.21* Form of amendment to the Company's 1990 Stock Option Plan, the 1991 Service Providers Stock Option Plan, the L.J. Melody Acquisition Stock Option Plan, and the Koll Acquisition Stock Option Plan, filed as Exhibit 10.23 to the Company's Form 10-K for the year ended December 31, 1997 10.22(i)* Purchase Agreement dated as of May 15, 1995 among CB Commercial Real Estate Group, Inc., Westmark Real Estate Acquisition Partnership, L.P., and certain individuals signatory thereto, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 30, 1995 10.22(ii)* Form of SPP Purchase Agreement by and among Westmark Real Estate Acquisition Partnership, L.P., CB Commercial Real Estate Group, Inc. and certain individuals, dated as of August 15, 1997, filed as Exhibit 10.24(ii) to the Company's Form 10-K for the year ended December 31, 1997 10.23+ Amended and Restated Employment Agreement by and between the Company and James J. Didion entered into as of March 3, 1999. 11 Statement concerning Computation of Per Share Earnings (filed as Note 11 of the Consolidated Financial Statements) 12 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends (filed as a Schedule Supporting the Consolidated Financial Statements--see Index to Consolidated Financial Statements) 21 Subsidiaries of the Company 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (filed only with the SEC)
- -------- *Incorporated by reference +Management contract or compensatory plan required by Item 601 of Regulation S-K EX-3.2 2 5TH AMENDED & RESTATED BYLAWS OF THE COMPANY EXHIBIT 3.2 FIFTH AMENDED AND RESTATED B Y - L A W S OF CB RICHARD ELLIS SERVICES, INC. (FORMERLY CB COMMERCIAL REAL ESTATE SERVICES GROUP, INC. AND CB COMMERCIAL HOLDINGS, INC.) (A DELAWARE CORPORATION) (ADOPTED NOVEMBER 17, 1998) TABLE OF CONTENTS ----------------- Page ---- ARTICLE 1 Offices......................................................... 1 1.1 Registered Office................................................... 1 1.2 Additional Offices.................................................. 1 ARTICLE 2 Meeting of Stockholders......................................... 1 2.1 Place of Meeting.................................................... 1 2.2 Annual Meeting...................................................... 1 2.3 Special Meetings.................................................... 2 2.4 Notice of Meetings.................................................. 2 2.5 Business Matter of a Special or Annual Meeting...................... 2 2.6 List of Stockholders................................................ 2 2.7 Organization and Conduct of Business................................ 3 2.8 Quorum and Adjournments............................................. 3 2.9 Voting Rights....................................................... 3 2.10 Majority Vote....................................................... 3 2.11 Proxies............................................................. 3 2.12 Inspectors of Election.............................................. 3 2.13 Action Without a Meeting............................................ 4 ARTICLE 3 Directors....................................................... 4 3.1 Qualifications...................................................... 4 3.2 Resignation and Vacancies........................................... 4 3.3 Removal of Directors................................................ 5 3.4 Powers.............................................................. 5 3.5 Place of Meetings................................................... 5 3.6 Annual Meetings..................................................... 5 3.7 Regular Meetings.................................................... 5 3.8 Special Meetings.................................................... 5 3.9 Quorum and Adjournments............................................. 5 3.10 Action Without Meeting.............................................. 5 3.11 Telephone Meetings.................................................. 6 3.12 Waiver of Notice.................................................... 6 3.13 Fees and Compensation of Directors.................................. 6 3.14 Rights of Inspection................................................ 6 ARTICLE 4 Committees of Directors......................................... 6 4.1 Selection........................................................... 6 4.2 Power............................................................... 6 4.3 Executive Committee................................................. 7 4.4 Committee Minutes................................................... 7 4.5 Section 141(c)...................................................... 7 ARTICLE 5 Officers........................................................ 7 5.1 Officers Designated................................................. 7 5.2 Appointment of Officers............................................. 7 5.3 Subordinate Officers................................................ 7 5.4 Removal and Resignation of Officers................................. 7 5.5 Vacancies in Offices................................................ 7 5.6 Compensation........................................................ 7 5.7 The Chairman of the Board........................................... 7 5.8 The Chief Executive Officer......................................... 8 5.9 The President....................................................... 8 5.10 The Vice President.................................................. 8 5.11 The Secretary....................................................... 8 5.12 The Assistant Secretary............................................. 8 5.13 The Chief Financial Officer......................................... 8 5.14 The Treasurer....................................................... 8 5.15 The Assistant Treasurer............................................. 9 5.16 Powers and Duties................................................... 9 ARTICLE 6 Stock Certificates.............................................. 9 6.1 Certificates for Shares............................................. 9 6.2 Signatures on Certificates.......................................... 9 6.3 Transfer of Stock................................................... 9 6.4 Registered Stockholders............................................. 9 6.5 Record Date......................................................... 9 6.6 Lost, Stolen or Destroyed Certificates.............................. 10 ARTICLE 7 Notices......................................................... 10 7.1 Notice.............................................................. 10 7.2 Waiver.............................................................. 10 ARTICLE 8 General Provisions.............................................. 10 8.1 Dividends........................................................... 10 8.2 Dividend Reserve.................................................... 10 8.3 Corporate Seal...................................................... 10 8.4 Execution of Corporate Contracts and Instruments.................... 11 ARTICLE 9 Amendments...................................................... 11 FIFTH AMENDED AND RESTATED -------------------------- B Y - L A W S ------------- OF -- CB RICHARD ELLIS SERVICES, INC. ------------------------------- (FORMERLY CB COMMERCIAL REAL ESTATE GROUP SERVICES GROUP, INC. AND CB COMMERCIAL HOLDINGS, INC.) (A DELAWARE CORPORATION) ARTICLE 1 --------- Offices ------- 1.1 Registered Office. The registered office of the Corporation shall be ----------------- 1013 Centre Road, City of Wilmington, County of New Castle, and the name of the registered agent in charge thereof is Corporation Service Company. 1.2 Additional Offices. The Corporation may also have offices at such ------------------ other places, either within or without the State of Delaware, as the Board of Directors (the "Board") may from time to time designate or the business of the Corporation may require. ARTICLE 2 ---------- Meeting of Stockholders ----------------------- 2.1 Place of Meeting. All meetings of the stockholders for the election ---------------- of directors shall be held at the principal office of the Corporation, at such place as may be fixed from time to time by the Board or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board and stated in the notice of the meeting. Meetings of stockholders for any purpose may be held at such time and place within or without the State of Delaware as the Board may fix from time to time and as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. 2.2 Annual Meeting. Annual meetings of stockholders shall be held each -------------- year at such date and time as shall be designated from time to time by the Board and stated in the notice of the meeting. At such annual meetings, the stockholders shall elect the directors by a plurality vote. The stockholders shall also transact such other business as may properly be brought before the meetings. To be properly brought before the annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board or the Chief Executive Officer, (b) otherwise properly brought before the meeting by or at the direction of the Board or the Chief Executive Officer, or (c) otherwise properly brought before the meeting by a stockholder of record. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered personally or deposited in the United States mail, or delivered to a common carrier for transmission to the recipient or actually transmitted by the person giving the notice by electronic means to the recipient or sent by other means of written communication, postage or delivery charges prepaid in all such cases, and received at the principal executive offices of the Corporation, addressed to the attention of the Secretary of the Corporation, not less than fifty (50) days nor more than seventy-five (75) days prior to the scheduled date of the meeting (regardless of any postponements, deferrals or adjournments of that meeting to a later date); provided, however, that in the event that less than sixty-five (65) days' notice or prior public disclosure of the date of the scheduled meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the earlier of (a) the close of business on the 15th day following the day on which such notice of the date of the scheduled annual meeting was mailed or such public disclosure was made, whichever first occurs, and (b) two days prior to the date of the scheduled meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class, series and number of shares of the Corporation that are owned beneficially by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section; provided, however, that nothing in this Section shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The Chairman of the Board of the Corporation (or such other person presiding at the meeting in accordance with these By-Laws) shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2.3 Special Meetings. Special meetings of the stockholders may be called ---------------- for any purpose or purposes, unless otherwise prescribed by the statute or by the Certificate of Incorporation, by the Chairman of the Board, the Chief Executive Officer of the Corporation or by a resolution duly adopted by the affirmative vote of a majority of the Board. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting shall be limited to matters related to the purpose or purposes stated in the notice of meeting. 2.4 Notice of Meetings. Written notice of stockholders' meetings, ------------------ stating the place, date and time of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days prior to the meeting. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 2.5 Business Matter of a Special or Annual Meeting. Business transacted ---------------------------------------------- at any special meeting of stockholders shall be limited to the purposes stated in the notice. Business transactions at an annual meeting shall not be limited to the purposes stated in the notice. 2.6 List of Stockholders. The officer in charge of the stock ledger of -------------------- the Corporation or the transfer agent shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at a place within the city where the meeting is to be held, which place, if other than the place of the meeting or the principal executive offices of the Corporation, shall be specified 2 in the notice of the meeting. The list shall also be produced and kept at the place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present in person thereat. 2.7 Organization and Conduct of Business. The Chairman of the Board or, ------------------------------------ in his absence, the Chief Executive Officer of the Corporation or, in his absence, such person as the Board may have designated or, in the absence of such a person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the Secretary of the meeting shall be such person as the chairman of the meeting appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her in order. 2.8 Quorum and Adjournments. Except where otherwise provided by law or ----------------------- the Certificate of Incorporation or these By-Laws, the holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented in proxy, shall constitute a quorum at all meetings of the stockholders. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to have less than a quorum if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat who are present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. 2.9 Voting Rights. Unless otherwise provided in the Certificate of ------------- Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. 2.10 Majority Vote. When a quorum is present at any meeting, the vote ------------- of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation or of these By-Laws a different vote is required in which case such express provision shall govern and control the decision of such question. 2.11 Proxies. Every person entitled to vote for directors or on any ------- other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by such person or such person's attorney-in-fact and filed with the Secretary of the Corporation. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the Corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven months from the date of the proxy, unless otherwise provided in the proxy. 2.12 Inspectors of Election. Before any meeting of stockholders the ---------------------- Board may appoint any person other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the 3 chairman of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill that vacancy. 2.13 Action Without a Meeting. No action required or permitted to be ------------------------ taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting and the power of the stockholders to consent in writing without a meeting to the taking of any action is specifically denied. ARTICLE 3 ---------- Directors --------- 3.1 Number; Qualifications. The Board shall consist of one or more ---------------------- members, the number thereof to be determined from time to time by resolution of the Board. The initial number of directors shall be thirteen (13). The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 3.2, and each director so elected shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board at the annual meeting, by or at the direction of the Board, may be made by any nominating committee or person appointed by the Board; nominations may also be made by any stockholder of record of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered personally or deposited in the United States mail, or delivered to a common carrier for transmission to the recipient or actually transmitted by the person giving the notice by electronic means to the recipient or sent by other means of written communication, postage or delivery charges prepaid in all such cases, and received at the principal executive offices of the Corporation addressed to the attention of the Secretary of the Corporation not less than one hundred twenty (120) days prior to the scheduled date of the meeting (regardless of any postponements, deferrals or adjournments of that meeting to a later date); provided, however, that, in the case of an annual meeting and in the event that less than one hundred (100) days' notice or prior public disclosure of the date of the scheduled meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 7th day following the day on which such notice of the date of the scheduled meeting was mailed or such public disclosure was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class, series and number of shares of capital stock of the Corporation that are owned beneficially by the person, (iv) a statement as to the person's citizenship, and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder and (ii) the class, series and number of shares of capital stock of the Corporation that are owned beneficially by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may be reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. In connection with any annual meeting, the Chairman of the Board (or such other person presiding at such meeting in accordance with these By-Laws) shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 3.2 Resignation and Vacancies. Unless otherwise provided in the ------------------------- Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected 4 by all the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Each director so chosen shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. If there are no directors in office, then an election of directors may be held in accordance with General Corporation Law of the State of Delaware. Unless otherwise provided in the Certificate of Incorporation, when one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in the filling of other vacancies. 3.3 Removal of Directors. Unless otherwise restricted by law, the -------------------- Certificate of Incorporation or these By-Laws, any director or the entire Board may be removed, with or without cause, by the holders of at least a majority of the shares entitled to vote at an election of directors. Notwithstanding the foregoing, if the Board of Directors is elected by cumulative voting and less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. 3.4 Powers. The business of the Corporation shall be managed by or ------ under the direction of the Board which may exercise all such powers of the Corporation and do all such lawful acts and things which are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. 3.5 Place of Meetings. The Board may hold meetings, both regular and ----------------- special, either within or without the State of Delaware. 3.6 Annual Meetings. The annual meeting of the Board shall be held --------------- immediately following the annual meeting of stockholders, and no notice of such meeting shall be necessary to the Board, provided a quorum shall be present. Annual meetings shall be for the purposes of organization, and an election of officers and the transaction of other business. 3.7 Regular Meetings. Regular meetings of the Board may be held without ---------------- notice at such time and place as may be determined from time to time by the Board. 3.8 Special Meetings. Special meetings of the Board may be called by the ---------------- Chairman of the Board, the Chief Executive Officer or any five (5) directors upon three (3) days' notice to each director, such notice to be delivered personally or by telephone, voice messaging system, telegraph, facsimile, electronic mail or other electronic means. 3.9 Quorum and Adjournments. At all meetings of the Board, a majority of ----------------------- the directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may otherwise be specifically provided by law or the Certificate of Incorporation. If a quorum is not present at any meeting of the Board, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting at which the adjournment is taken, until a quorum shall be present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved of by at least a majority of the required quorum for that meeting. 3.10 Action Without Meeting. Unless otherwise restricted by the ---------------------- Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 5 3.11 Telephone Meetings. Unless otherwise restricted by the Certificate ------------------ of Incorporation or these By-Laws, any member of the Board or any committee may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.12 Waiver of Notice. Notice of a meeting need not be given to any ---------------- director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 3.13 Fees and Compensation of Directors. Unless otherwise restricted by ---------------------------------- the Certificate of Incorporation or these By-Laws, the Board shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board and may be paid a fixed sum for attendance at each meeting of the Board or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.14 Rights of Inspection. Every director shall have the absolute right -------------------- at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts. ARTICLE 4 ---------- Committees of Directors ----------------------- 4.1 Selection. The Board may, by resolution passed by a majority of the --------- entire Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. 4.2 Power. Any such committee, to the extent provided in the resolution ----- of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, removing or indemnifying directors or amending the By-Laws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. 6 4.3 Executive Committee. The Executive Committee shall have and may ------------------- exercise such powers and authority as the Board may from time to time determine in accordance with these By-Laws. 4.4 Committee Minutes. Each committee shall keep regular minutes of its ----------------- meetings and report the same to the Board when required. 4.5 Section 141(c). The Corporation hereby elects to be governed by the -------------- provisions of Section 141(c) of the Delaware General Corporation Law, as amended effective July 1, 1996. ARTICLE 5 ---------- Officers -------- 5.1 Officers Designated. The officers of the Corporation shall be a ------------------- Chairman, a Chief Executive Officer, a President, a Secretary and a Chief Financial Officer. The officers of the Corporation may also include one or more Vice Presidents, a Treasurer, one or more assistant Secretaries and assistant Treasurers and such other officers as the Board of Directors may determine. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. 5.2 Appointment of Officers. The Chairman, Chief Executive Officer, ----------------------- President and Chief Financial Officer of the Corporation shall be appointed by the Board, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. 5.3 Subordinate Officers. The Chief Executive Officer shall appoint the -------------------- Secretary, the Treasurer and such other officers and agents as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the By-Laws or as the Board may from time to time determine. 5.4 Removal and Resignation of Officers. Subject to the rights, if any, ----------------------------------- of an officer under any contract of employment, any officer may be removed, either with or without cause, in the case of an officer chosen by the Board, by an affirmative vote of the majority of the Board, at any regular or special meeting of the Board, or, in case of an officer chosen by the Chief Executive Officer, by the Chief Executive Officer. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 5.5 Vacancies in Offices. A vacancy in any office because of death, -------------------- resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these By-Laws for regular appointment to that office. 5.6 Compensation. The salaries of the Chairman of the Board and the ------------ Chief Executive Officer shall be fixed from time to time by the Board. The salaries of the President (if the President is neither the Chairman nor the Chief Executive Officer) and the Chief Financial Officer shall be fixed from time to time by the Board after taking account of the recommendation of the Chief Executive Officer. The salaries of all other officers of the Corporation shall be fixed from time to time by the Chief Executive Officer. No officer shall be prevented from receiving a salary because he is also a director of the Corporation. 5.7 The Chairman of the Board. The Chairman of the Board shall be any ------------------------- director who is selected by a majority of the directors. The Chairman of the Board shall preside, when present, at all meetings of the stockholders and the Board. He shall counsel the Chief Executive Officer and other officers of the Corporation and 7 shall exercise such powers and perform such duties as shall be assigned to or required of them from time to time by the Board, or as provided in these By-Laws (which duties shall not be changed without the approval of a majority of the directors). 5.8 The Chief Executive Officer. Subject to such supervisory powers, if --------------------------- any, as may be given by the Board to the Chairman of the Board, if there be such an officer, the Chief Executive Officer shall preside, in the absence of the Chairman of the Board, at all meetings of the stockholders and the Board, shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board are carried into effect. 5.9 The President. The President, in the absence of the Chief Executive ------------- Officer or his disability or refusal to act, shall perform the duties of the Chief Executive Officer and when so acting shall have the powers of and be subject to all the restrictions upon the Chief Executive Officer. The President shall perform such other duties and have such other powers as may from time to time be prescribed by the Board, the Chief Executive Officer or the Chairman of the Board. 5.10 The Vice President. The Vice President (or in the event there be ------------------ more than one, the Vice Presidents in the order designated by the directors, or in the absence of any designation, in the order of their election), shall, in the absence of the President or in the event of his disability or refusal to act, perform the duties of the President, and when so acting, shall have the powers of and be subject to all the restrictions upon the President. The Vice President(s) shall perform such other duties and have such other powers as may from time to time be prescribed for them by the Board, the Chief Executive Officer, the President, the Chairman of the Board or these By-Laws. 5.11 The Secretary. The Secretary shall attend all meetings of the Board ------------- and the stockholders and record all votes and the proceedings of the meetings in a book to be kept for that purpose and shall perform like duties for the standing committees, when required. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board, and shall perform such other duties as may from time to time be prescribed by the Board, the Chairman of the Board or the President, under whose supervision he or she shall act. The Secretary shall have custody of the seal of the Corporation, and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and, when so affixed, the seal may be attested by his or her signature or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing thereof by his or her signature. 5.12 The Assistant Secretary. The Assistant Secretary or, if there be ----------------------- more than one, the Assistant Secretaries in the order designated by the Board (or in the absence of any designation, in the order of their election) shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. 5.13 The Chief Financial Officer. The Chief Financial Officer shall have --------------------------- the custody of the Corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board. The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and the Board, at its regular meetings, or when the Board so requires, an account of all his or her transactions as the Chief Financial Officer and of the financial condition of the Corporation. 5.14 The Treasurer. The Treasurer shall, in the absence of the Chief ------------- Financial Officer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Chief Financial Officer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. 8 5.15 The Assistant Treasurer. The Assistant Treasurer, or if there shall ----------------------- be more than one, the Assistant Treasurers in the order designated by the Board (or in the absence of any designation, in the order of their election) shall, in the absence of the Treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. 5.16 Powers and Duties. The officers of the Corporation shall have such ----------------- powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board. ARTICLE 6 ---------- Stock Certificates ------------------ 6.1 Certificates for Shares. The shares of the Corporation shall be ----------------------- represented by certificates or shall be uncertificated. Certificates shall be signed by, or in the name of the Corporation by, the Chairman of the Board, or the Chief Executive Officer or the President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. Within a reasonable time after the issuance or transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required by the General Corporation Law of the State of Delaware or a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 6.2 Signatures on Certificates. Any or all of the signatures on a -------------------------- certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 6.3 Transfer of Stock. Upon surrender to the Corporation or the transfer ----------------- agent of the Corporation of a certificate of shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated shares, such uncertificated shares shall be canceled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the Corporation. 6.4 Registered Stockholders. The Corporation shall be entitled to ----------------------- recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 6.5 Record Date. (a) In order that the Corporation may determine the ----------- stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A 9 determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided -------- that the Board may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. 6.6 Lost, Stolen or Destroyed Certificates. The Corporation may issue a -------------------------------------- new certificate or certificates to replace any certificate or certificates theretofore issued by it alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When issuing a new certificate or certificates, the Corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require, and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. ARTICLE 7 --------- Notices ------- 7.1 Notice. Whenever, under the provisions of the statutes or of the ------ Certificate of Incorporation or of these By-Laws, notice is required to be given to any director or stockholder it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his or her address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by written notice delivered personally, telegram, telephone, facsimile, electronic mail or other electronic means. 7.2 Waiver. Whenever any notice is required to be given under the ------ provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE 8 ---------- General Provisions ------------------ 8.1 Dividends. Dividends upon the capital stock of the Corporation, --------- subject to any restrictions contained in the General Corporation Laws of Delaware or the provisions of the Certificate of Incorporation, if any, may be declared by the Board at any regular or special meeting. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. 8.2 Dividend Reserve. Before payment of any dividend, there may be set ---------------- aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. 8.3 Corporate Seal. The Board may provide a suitable seal, containing the -------------- name of the Corporation, which seal shall be in the charge of the Secretary. 10 8.4 Execution of Corporate Contracts and Instruments. The Board, except as ------------------------------------------------ otherwise provided in these By-Laws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee (other than the Chief Executive Officer) shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. ARTICLE 9 ---------- Amendments ---------- These By-Laws may be altered, amended or repealed or new By-Laws may be adopted as provided for in the Certificate of Incorporation. 11 EX-10.3 3 AMENDED & RESTATED ANNUAL MANAGEMENT BONUS PLAN Exhibit 10.3 AMENDED AND RESTATED CB RICHARD ELLIS ANNUAL MANAGEMENT BONUS PLAN EFFECTIVE JANUARY 1, 1999 1. REWARDS FOR COMPANY PRODUCTIVITY The CB Richard Ellis Annual Management Bonus Plan (the "Plan") was amended and restated effective January 1, 1999 to read as set forth herein. The Plan has been designed to reward and stimulate Participant effort toward successful attainment of the CBRE Group's goals by directly tying the Participant's compensation to CBRE Group and individual results achieved. The "CBRE Group" consists of those entities which are directly or indirectly controlled by or in control of or under common control with CB Richard Ellis Services, Inc. CB Richard Ellis, Inc. administers the plan for the CBRE Group. 2. WHO IS ELIGIBLE? Participants in the Plan will be selected by the Chief Executive Officer of CB Richard Ellis Services, Inc. or his delegatee (the "CEO") except that the Compensation Committee of the Board of Directors (the "Compensation Committee") will select which, if any, executive officers for purposes of the Securities Exchange Act of 1934, will participate. Eligibility for participation will be limited to those employees of the CBRE Group whose position affords the opportunity to materially affect the CBRE Group's overall profitability. Participation begins on the first day of the month following selection as a Participant. 3. HOW THE PLAN WORKS A Participant is eligible for a bonus each year, based on the weighting of three factors: (1) the consolidated "Earnings Before Taxes, Depreciation and Amortization" or "EBTDA" of CB Richard Ellis Services, Inc., (2) performance of the Participant's line of business or operating unit, and (3) the Participant's individual performance. The following is a general overview of the Plan: a. In the beginning of each calendar year (or such other date as participation commences), each Participant receives a Reference Point Award (RPA). The RPA is the target bonus amount which is annually established based on a Participant's position and the position's potential contribution to the CBRE Group. For executive officers the RPA will be established by the Compensation Committee of the Board of Directors. b. EBTDA targets for the CBRE Group performance targets for each line of business, and individual performance priorities are established at the beginning of a calendar year (or such other date as participation commences) for each Participant in order to measure his or her performance at the end of a year. Each of the three factors (consolidated EBTDA, line of business performance and personal performance) is weighted based on the Participant's position with the total of the weightings equaling 100%. For example, for a senior corporate executive in charge of a line of business the weighting might be 40% CBRE Group performance, 40% line of business performance and 20% individual performance. For executive officers all targets will be set by the Compensation Committee of the Board of Directors. The Compensation Committee sets the EBTDA targets for all Participants. c. At the end of the calendar year each of the three factors is calculated as follows: (i) CB Richard Ellis Services, Inc. performance is measured against the consolidated EBTDA target set by the Board's Compensation Committee at the start of the year, with the factor established as follows:
Factor Example ------ ------- 0-70% of target.............. 0 = 0% factor 70%-100% of target.......... 0%-100% pro rata 90% of target = 67% factor 100%-200% of target.......... 100%-300% pro rata 120% of target = 140% factor
1 (ii) Line of business performance is measured against the target set by the Chief Executive Officer (by the Compensation Committee in the case of executive officers) at the start of the year with the same adjustments as set out in 3(c) above. (iii) Personal performance is measured against the written objectives established at the start of the year by the CEO for everyone except executive officers and by the Compensation Committee for executive officers. This factor is capped at 100%. d. The actual bonus payment is determined by multiplying each performance factor, as adjusted in Section 3(c)(i) above, by the percentage weighting assigned to it for the individual involved and then adding the three percentages together. The total percentage is then multiplied by the individual's RPA to get the bonus payable for the year. Total bonuses are limited to 25% of CB Richard Ellis Services, Inc.'s consolidated pre-tax, pre-bonus profitability after taking account of such other senior management incentive payments as may be determined by the CEO. If the total bonuses and incentives estimated to be paid are greater than 25%, then bonuses will be adjusted as determined by the CEO (by the Compensation Committee in the case of executive officers) so that actual bonuses paid meet the 25% limit. 4. LINE OF BUSINESS PERFORMANCE Line of business performance goals will vary with the nature of the business and the objectives of the CBRE Group with respect to that business. 5. INDIVIDUAL PERFORMANCE PRIORITIES Performance priorities for each individual will be established annually and reviewed periodically. These will express important CBRE Group objectives in each Participant's area of responsibility and will take into account such considerations as the difficulty of achieving the task and the potential for significantly exceeding or falling short of the performance priority due to economic conditions. Individual performance priorities will be established so that 100% achievement would be a truly outstanding performance which, while potentially achievable, represents an appreciable challenge. Each Participant will have a minimum of three and a maximum of six personal performance priorities. The performance priorities will be in writing and each will be individually weighted through agreement with the individual's manager subject to approval by the CEO (by the Compensation Committee in the case of executive officers). At the end of the year, the extent to which the Participant has met his/her individual performance priorities will be determined by the CEO or, in the case of executive officers, the Compensation Committee. The result will be utilized as one of the factors for determining the amount of bonus earned. Achievement ratings on individual Performance Priorities may range from zero to 100%. 2 6. BONUS DETERMINATION PROCESS The actual bonus payment earned by a Participant will be determined by formula as described below: Example: Assume: RPA = $50,000 Factor Weighting: Company = 10% L.O.B. = 50% Individual Performance Priority = 40% Company EBTDA target = $150 mill Actual = $155 mill or 103% L.O.B. target = $15 mill Actual = $14 mill or 93% Individual Performance Priorities actual = 90% Calculations:
Company Target Factor -------------- ------ (100% to 200% Adj. Factor) $155 mill = 3% X 2 = 6%. 106% X 10% = 10.6% $150 mill L.O.B. Target ------------- (70% to 100% Adj. Factor) (weight) $14 mill = .93-.70 = .23 X 3.3 = .77 X 50% = 38.5% $15 mill Individual Target ----------------- (weight) .90 X .40 = 36.0% ----- RAP Adjustment = 85.1% Bonus = $50,000 X 85.1% = $42,550
7. CEO AWARDS Additionally, exceptional achievement by a Participant may be rewarded with a supplemental discretionary award, referred to as a "CEO Award." Such awards may be authorized by the CEO in cases of exceptional and exceedingly deserving circumstances. These supplemental awards will generally be made to recognize a unique contribution to improved profitability (present or future) of the Company. In any particular year, CEO Awards may, or may not, be granted depending upon actual occurrences and the judgement of the CEO. The CEO's Awards will not exceed $40,000 for any single individual or more than an aggregate of $750,000 in any year for all Participants. Executive officers are not eligible for CEO awards. 8. HOW BONUSES ARE PAID It is CB Richard Ellis' intent that all bonuses earned will be paid in cash. However, CB Richard Ellis reserves the right to distribute common stock in CB Richard Ellis Services, Inc. or other non-cash forms of compensation in lieu of cash in the event economic circumstances dictate such action. Subject to management's final approval of bonus awards, bonuses will be distributed after the end of the fiscal year and the completion of the Company's audit, usually in late February. Federal and state income taxes and other required taxes will be deducted from bonuses. 3 9. EMPLOYEE TRANSFERS If an employee transfers to a new position, he or she is eligible for a bonus as follows: . If the transfer is to a position that is not currently eligible for participation in the Plan, the Participant will receive a prorated bonus based on the number of full calendar months worked in the eligible position. . If the transfer (which could be in the form of a promotion) is to another position which is eligible for the Executive Bonus Plan, the Participant will receive a prorated bonus for each position based on the number of full months worked in each position, and his or her ratings for each position. 10. IF EMPLOYMENT STATUS CHANGES If employment terminates during the year, eligibility for a bonus will depend on the reason for the termination: (a) General. If the termination is for any reason other than total and permanent disability, retirement or death all rights to a bonus are forfeited without regard to whether the Participant quits or is terminated with or without cause. (b) Retirement. If an employee retires at age 55 or older with at least 15 years of service with the CBRE Group or at age 65 or older regardless of years of service and has participated in the Plan for at least six months of the year, the bonus will be prorated based on the number of full months of participation in the Plan. The prorated bonus will be paid at the time bonuses are paid to all Participants. If participation in the Plan is for less than six months during the year of retirement, the Participant is not eligible for a bonus for that year. (c) Death or total disability If a Participant dies during a year or is totally and permanently disabled as defined in the CB Richard Ellis, Inc. Long Term Disability Plan, the bonus will be prorated based on the number of full months of participation in the Plan. The prorated bonus will be paid at the time bonuses are paid to all Participants. In the case of death, payment will be made to the beneficiary designated for group term life insurance or if there is no such beneficiary to the Participant's estate. 11. AMENDMENT, TERMINATION AND INTERPRETATION CB Richard Ellis Services, Inc. reserves the right at any time prior to payment of the awards to review, interpret, alter, amend, or terminate (discontinue) the Amended and Restated Annual Management Bonus Plan, including, without limitation, the calculation and method of and eligibility for award payments. This Plan does not constitute a contract of employment (express or implied) or any other form of contract and cannot be relied upon as such. This Plan does not alter the right of any member of the CBRE Group to terminate an employee's employment with or without cause and regardless of due process. The CEO's decision with respect to the interpretation of the Plan and its application to any individual shall be conclusive and binding on all persons involved, except that all such decisions with respect to executive officers shall be made by the Compensation Committee. 12. MISCELLANEOUS (a) Governing Law. The Plan and each option granted hereunder shall be subject to and construed under the laws of the State of Delaware as though all parties were residents of Delaware. (b) Arbitration. Any and all disputes with respect to the Plan or any Option granted hereunder shall be resolved by arbitration in Los Angeles, California under the Commercial Arbitration Rules of the American Arbitration Association using a single arbitrator. The arbitrator's award shall be conclusive, final and binding with respect to the parties thereto. The fees of the arbitrator shall be borne by CBRE and each party shall bear its own costs including attorney fees. (c) Headings. The headings herein are for convenience only and shall not be used in interpreting the Plan. 4 EX-10.23 4 AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.23 EXECUTION COPY AMENDED AND RESTATED EMPLOYMENT AGREEMENT ---------------------------------------- THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of the 3rd day of March, 1999, effective as of the Effective Date (as such term is hereinafter defined), by and between CB RICHARD ELLIS SERVICES, INC. (the "Company"), and JAMES J. DIDION ("Executive"). W I T N E S S E T H: WHEREAS, Executive and the Company have entered into the Employment Agreement, dated as of June 1, 1997 (the "Existing Employment Agreement"), ----------------------------- providing for the Company's employment of Executive as the Chairman of the Board and Chief Executive Officer of the Company; WHEREAS, Executive wishes to resign from the position of Chief Executive Officer on the Effective Date but continue as an employee of the Company in a different capacity; and WHEREAS, Executive and the Company deem it to be in their respective best interests to amend and restate the Existing Employment Agreement upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, it is hereby agreed as follows: 1. Effective Date; Pro Rata Bonus. ------------------------------ (a) From the date of this Agreement until the later of May 18, 1999 or such other date on which the 1999 annual meeting of the Company's shareholders is held and the Company designates a new Chief Executive Officer (the "Trigger Date"), the Company agrees to continue to pay to Executive the ------------ base salary, bonus and benefits set forth in the Existing Employment Agreement, payable in regular installments in accordance with the Company's normal payroll procedures. On the Trigger Date, Executive shall submit a letter of resignation to the Board of Directors of the Company (the "Board of Directors") to resign ------------------ from the position of Chief Executive Officer and this Agreement shall become effective on the date (the "Effective Date") immediately following the Trigger -------------- Date; provided, however, that in the event the Board of Directors refuses to ----------------- accept Executive's resignation and Executive is reinstated as the Chief Executive Officer on the Trigger Date, this Agreement shall become null and void and the Existing Employment Agreement shall continue in full force in effect. (b) In all events, Executive shall be entitled to receive a pro-rata portion of the annual bonus ("Pro-Rata Bonus") which he would have earned under -------------- the Existing Employment Agreement if he were employed as the Chief Executive Officer of the Company for the entire 1999 calender year, with such pro-rata portion being calculated as the product of the annual bonus multiplied by a fraction, the numerator of which is the number of days employed as the Chief Executive Officer of the Company in 1999 and the denominator of which is 365 days. In addition, in the event, and only to the extent, Executive receive such Pro-Rata Bonus for calendar year 1999 (which Pro-Rata Bonus shall constitute an "annual bonus award" under the Equity Promissory Note) and the amount of such Pro-Rata Bonus results in forgiveness of interest accrued on the Equity Promissory Note during calendar year 1999 under the existing formula set forth in Section 3 thereof, Executive will be entitled to have such interest accrued in 1999 forgiven. For purposes of this Agreement, the term "Equity Promissory ----------------- Note" shall mean the Promissory Note, dated August 12, 1996, made by Executive - ---- in favor of the Company in the original principal amount of $1750,270.00 in connection with Executive's purchase of the Company's shares under the "Equity Incentive Plan" of the Company. 2. Duties. The Company hereby agrees to employ Executive as its ------ Chairman of the Board and Senior Advisor for the "Employment Period" (as such term is hereinafter defined); provided, however, that in the event the Board of Directors or Executive shall have determined on or before December 31, 1999 or at time thereafter that Executive shall resign from the position of the Chairman of the Board, (a) Executive's title shall change automatically to Senior Advisor without any further action on the part of the parties hereto and (b) at any time thereafter, Executive shall have the right to modify his status with the Company from an employee to an independent contractor during the Employment period and, to the extent permitted by the applicable law, all of the provisions of this Agreement shall continue to remain in full force and effect during the remainder of the Employment Period. The Company and Executive hereby agree to enter into any and all agreements necessary to effectuate the purpose of clause (b) of this Section 2, including amendments to Executive's existing stock option agreements to provide that such stock options will continue to vest and remain outstanding while Executive continues as an independent contractor to the same extent as if he remained an employee. Executive in either capacity agrees to use his best efforts during the Employment Period to protect, encourage and promote the interests of the Company and its subsidiaries and affiliates (collectively, the "Affiliates"). During the Employment Period, Executive shall also perform such other duties consistent with the offices held by Executive, including overseas business travels, as may be -2- reasonably assigned to him from time to time by the Chief Executive Officer of the Company, and will devote substantial time and attention to such duties, except while on sick leave, reasonable vacations and excused leaves of absence; provided, however, that Executive shall not be required to perform services in - -------- ------- excess of 100 hours per month (including travel time). 3. Compensation and Benefits. ------------------------- (a) The Company agrees to pay to Executive an annual base salary during the Employment Period equal to five hundred thousand dollars ($500,000) per year ("Base Salary"), provided that during the period from and after the ----------- Effective Date to and including December 31, 1999, Executive shall receive a pro-rata portion his Base Salary, in each case payable in regular installments in accordance with the Company's normal payroll procedures. (b) The Company shall furnish Executive with, and Executive shall be allowed full use of, office facilities, secretarial and clerical assistance, and other Company property and services of quality, nature and to the extent made available to senior executive employees of the Company from time to time, including a Company office (a "Personal Office"), initially in Monterey, --------------- County, with one secretarial employee of the Company mutually agreeable to Executive and the Company, which Personal Office shall be similar in quality to an office of the Company used by Executive immediately prior to the Effective Date, and the Company shall pay for all reasonable expenses for the operation of such Personal Office. (c) Executive shall be eligible to participate in the life, health, long-term disability insurance, deferred compensation plans and 401(k) plan of the Company (the "Company Benefit Plans") available to other senior --------------------- executive employees of the Company, provided that upon the change in Executive's status from an employee to an independent contractor pursuant to Section 2(b) hereof. Executive shall have the right to terminate his participation in any deferred compensation plan. (d) Executive shall be allowed 5 weeks of vacation and paid leaves of absence on the same basis as other senior executive employees of the Company. (e) The Company will reimburse Executive for reasonable business expenses in performing Executive's duties and promoting the businesses of the Company and its Affiliates, including, without limitation, reasonable entertaining expenses, automobile expenses, and travel and lodging, when incurred in connection with -3- business matters of the Company or an Affiliate assigned to Executive from time to time. The cost of these items shall be borne by the Company upon presentation of an itemized expense voucher. (f) The payment of interest on the existing Equity Promissory Note and the existing Promissory Note, dated October 15, 1998, made by Executive in favor of the Company in the original principal amount of $838,125.00 in connection with Executive's exercise of the stock options under the "Service Providers Stock Option Plan" of the Company (the "Option Promissory Note") shall ------------------------ be deferred until, and all such deferred interest shall become due and payable on, the applicable maturity date of each of the Equity Promissory Note and the Option Promissory Note, subject, however, to the provisions of each such promissory note relating to mandatory prepayment of interest and principal thereunder upon the occurrence of certain specified events, including, without limitation, transfer of such Company shares by Executive to another person or entity. Interest which is deferred under this Section 3(f) will accrue at simple interest, not compound interest. 4. Employment Period As used herein, the phrase "Employment Period" shall ----------------- ------------------- mean the period commencing on the Effective Date and ending on the 10th anniversary thereof. Notwithstanding the foregoing, the Employment Period shall expire on the first to occur of the following: (a) Termination without Cause. If the Employment Period is terminated by ------------------------- the Company without Cause, Executive shall be entitled to continue to receive his Base Salary for the period beginning on the date of such termination and ending on the 10th anniversary of the Effective Date. The payments of Executive's Base Salary by the Company under this Section 4(a) will be made periodically in the same amounts and at the same intervals as if the Employment Period had not ended and Executive's Base Salary otherwise continued to be paid. In addition, (1) all unvested stock options and unvested "Equity Incentive Plan" shares previously granted to Executive shall automatically vest in full and (ii) the Company shall provide Executive with substantially the same level of medical benefits in effect for Executive as of the date of Executive's termination, with Executive remaining obligated to continue to pay employee contributions towards such coverage at the same level as in effect as of the date of Executive's termination until the earlier of (A) the expiration of the Employment Period and (B) the date Executive becomes employed by another party. Executive shall not be required to mitigate the amount of any payment or benefit provided for under this Section 4 (a) by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4(a) be reduced by any compensation earned by Executive as a result of other employment. Payment to Executive pursuant to this Section 4(a) shall constitute the entire obligation of the Company for severance pay and full settlement of any claim for severance pay under law or in equity that Executive might otherwise assert against the Company or any of its employees, officers or directors on account of the Company's termination of the Employment Period without Cause. Executive shall remain entitled to any benefits which are then due to him under the Company Benefit Plans. (b) Termination for Cause. The Company shall have the right to terminate --------------------- Executive's employment at any time for Cause by giving Executive written notice of the effective date of termination (which effective date may, except as otherwise provided below, be the date of such notice). For purposes of this Agreement, "Cause" shall mean: ----- (i) fraud, misappropriation, embezzlement or other proven, felonious act of willful and material misconduct against the Company or any of its Affiliates; (ii) willful and substantial failure to render services (except by reason of Disability (as such term is hereinafter defined) or incapacity) or comply with the agreements and covenants set forth herein in accordance with the terms of this Agreement, provided that (A) a demand for performance of services had been delivered to Executive by the Chief Executive Officer of the Company at least thirty (30) days prior to termination identifying the manner in which such Chief Executive Officer believes that Executive has failed to perform or comply and (B) Executive has thereafter failed to remedy such failure to perform or comply; or (iii) conviction of or plea of guilty or nolo contendere to a felony. If the Company terminates Executive's employment for any of the reasons set forth in this Section 4(b), the Company shall have no further obligations hereunder from and after the effective date of termination and shall have all other rights and remedies available under this or any other agreement and at law or in equity, except that Executive shall remain entitled to any benefits which are then due to him under the Company Benefit Plans. If Executive's employment is terminated for Cause and Executive does not consent to such termination, such termination shall not be considered effective and Executive's rights under this Agreement during the Employment Period shall continue (including, without limitation, the provisions of Section 3 hereof) until the existence of such Cause has been determined by an independent arbitrator appointed by -5- the American Arbitration Association and either party's rights to petition a court of law for a decision in the matter have been exhausted. In connection with the appointment of an arbitrator, both parties agree to submit the question to final and binding arbitration in San Francisco, California by an appointee of the American Arbitration Association and to cooperate with the arbitrator. If the arbitrator determines that Executive's termination was for Cause, then Executive shall repay to the Company all compensation received pursuant to Section 3 hereof during the period commencing upon Executive's termination and ending upon the arbitrator's final determination. (c) Termination on Account of Disability. If the Employment Period ------------------------------------ is terminated by the Company because of Executive's Disability (as such term is hereinafter defined), in addition to any benefits paid or payable to Executive under any long-term disability insurance policy maintained for the benefit of Executive, Executive shall be entitled to continue to receive his Base Salary for the period beginning on the date of such termination and ending on the 10th anniversary of the Effective Date. The payments of Executive's Base Salary by the Company under this Section 4(c) will be made periodically in the same amounts and at the same intervals as if the Employment Period had not ended and Executive's Base Salary otherwise continued to be paid. For purposes of this Agreement, "Disability" shall mean Executive's inability to perform his duties ---------- under this Agreement for one hundred eighty (180) consecutive days during any twelve (12) month period due to illness, accident or other incapacity (as determined in good faith by a physician mutually acceptable to the Company and Executive). All unvested stock options and unvested "Equity Incentive Plan" shares previously granted to Executive shall vest in full upon Executive's Disability. Executive shall remain entitled to any benefits which are then due to him under the Company Benefit Plans. (d) Termination on Account of Death. In the event of Executive's ------------------------------- death during the Employment Period, in addition to any benefits paid or payable to Executive under any life insurance policy maintained by Executive, the Company shall pay to such person or persons, as Executive may specifically designate (successively or contingently) to receive payments under this Agreement following Executive's death (the "Designated Beneficiary"), ---------------------- Executive's Base Salary for the period beginning on the date of such termination and ending on the 10th anniversary of the Effective Date. The payments of Executive's Base Salary by the Company under this Section 4(d) will be made periodically in the same amounts and at the same intervals as if the Employment Period had not ended and Executive's Base Salary otherwise continued to be paid. All unvested stock options and unvested "Equity Incentive Plan" shares previously granted to Executive shall vest in full upon Executive's death. (e) Voluntary Termination by Executive. In the event that Executive's ---------------------------------- service with the Company is voluntarily terminated by Executive (excluding a change in his status from an employee to an independent contractor pursuant to Section 2(b) hereof), the Company shall have no further obligations hereunder from and after the effective date of such termination and shall have all other rights and remedies available under this or any other agreement and at law or in equity. Executive shall remain entitled to any benefits accrued by him prior to the date of termination under the Company Benefit Plans. 5. Confidential Information. ------------------------ (a) Executive agrees that any and all confidential knowledge or information, including but not limited to customer lists, books, records, data, formulae, specifications, inventions, processes and methods, developments, and improvements, which has or have been or may be obtained or learned by Executive in the course of his employment with the Company, will be held confidential by Executive and that Executive will not disclose the same to any person outside the Company either during his employment with the Company or after his of employment with the Company has terminated. (b) Executive agrees that upon termination of his employment with the Company, he will immediately surrender and turn over to the Company all customer lists, books, records, forms, specifications, formulae, data, and all papers and writings relating to the business of the Company and other property belonging to the Company, it being understood and agreed that the same are the sole property of the Company and the Executive will not make or retain any copies thereof. (c) Executive agrees that all inventions, developments or improvements which he makes, conceives, invents, discovers or otherwise acquires during his employment with the Company in the scope of his responsibilities or otherwise shall become the sole property of the Company. 6. Non-Competition; Non-Solicitation. --------------------------------- (a) Executive acknowledges that, in the course of his employment with the Company, he has become familiar, or will become familiar, with the Company's trade secrets and with other confidential Information concerning the Company and that his services have been and will be of special, unique and extraordinary value to the Company. Therefore, Executive agrees that, during the GEmployment Period (the "Non-Compete Period"), he shall not directly or -------------------- indirectly own, manage, control, participate in, consult with, render services for, or in any manner engage in any business competing with the businesses of the Company or any of its Affiliates as such businesses exist or are in the active process (such that the Company or such Affiliate has expended significant resources, either in terms of time, effort or money) of being formed or acquired as of the date of the termination of Executive's employment, within any Restricted Territory. For purposes of this Agreement, the term "Restricted ---------- Territory" means (A) the State of California; (B) any other state in the - --------- continental United States; (C) Alaska and Hawaii; and (D) any other territory or possession of the United States. Nothing herein shall prohibit Executive from being a member of the board of directors of or owning an equity interest in any real estate investment trust, real estate operating company or any other real estate or other company not competing with the Company or any of its Affiliates, provided that at least 30 days prior to becoming a member of the board of directors of any company, Executive shall deliver a written notice to the Company, together with a description of Executive's involvement or role in such company. This Section 6(a) shall not apply to (y) Executive or Executive and one or more partners of Executive investing directly (or indirectly through an intervening entity) in real estate or (z) Executive or such partners or entity providing services with respect to such real estate or such entity so long as no fees, other than the reimbursement of costs, are charged, directly or indirectly, by Executive or such partners or entity for such services. (b) During the Non-Compete Period, Executive shall not directly or indirectly through another person or entity (i) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere with the relationship between the Company and any employee thereof, (ii) hire any person who was an employee of the Company until six months after such individual's employment relationship with the Company has been terminated or (iii) induce or attempt to induce any customer, licensee or other business relation of the Company to cease doing business with the Company, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company. 7. Injunctive Relief. Because Executive's services are unique and because ----------------- Executive has access to Confidential Information, the parties hereto agree that money damages would be an inadequate remedy for any breach of this Agreement. Therefore, in the event of a breach or threatened breach of Section 5 or 6 of this Agreement, the Company or its successors or assigns may, in addition to other rights or remedies existing in their favor, -8- apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security). 8. Keyman Life and Disability Insurance. The Company may, for its own ------------------------------------ benefit, maintain "keyman" life and disability insurance policies covering Executive. Executive shall cooperate with the Company and provide such information or other assistance as the Company may reasonably request in connection with the Company obtaining and maintaining such policies. 9. Change in Control. In the event of a Change in Control (as such term is hereinafter defined) of the Company, (a) all unvested stock options and unvested "Equity Incentive Plan" shares previously granted to Executive shall vest in full and (b) the Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession or assignment had taken place. For purposes of this Agreement, the term "Company" ------- shall include any successor or assign to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise and the term "Change in Control" means (i) the dissolution or liquidation of the ----------------- Company; (ii) a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation; (iii) approval by the stockholders of the Company of any sale, lease, exchange or other transfer (in one or a series of transactions) of all or substantially all of the assets of the Company; (iv) approval by the stockholders of the Company of any merger or consolidation of the Company in which the holders of the voting stock of the Company immediately before the merger or consolidation will not own fifty percent (50%) or more of the outstanding voting shares of the continuing or surviving corporation immediately after such merger or consolidation; or (v) a change of 50% or more (rounded to the next whole person) in the membership of the Board of Directors within a 12- month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of at least 75% (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the 12-month period. -9- 10. Representations. --------------- (a) Executive hereby represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, breach, violate or cause a default under any agreement, contract or instrument to which Executive is a party or any judgment, order or decree to which Executive is subject, and (ii) Executive is not a party to or bound by any employment agreement, consulting agreement, non-compete agreement, confidentiality agreement or similar agreement with any other person or entity. (b) The Company hereby represents and warrants to Executive that (i) this Agreement has been duly authorized by all necessary corporate action on the part of the Company; and (ii) the execution, delivery and performance of this Agreement by the Company does not and will not conflict with, breach, violate or cause a default under any agreement, contract or instrument to which the Company is a party or any judgment, order or decree to which the Company is subject. 11. Release. ------- (a) Executive, for Executive, Executive's successors, administrators, heirs and assigns, hereby fully and generally releases, waives and forever discharges the Company and its stockholders, directors, officers, employees, agents and attorneys, whether past, present or future (the "Release ------- Parties"), from any and all actions, suits, debts, demands, damages, claims, - ------- judgments, liabilities, benefits or other remedial relief of any nature, including, costs and atttorneys' fees, based on acts or occurrences prior to execution of this Agreement, whether known or unknown, including, without limitation, all claims arising out of Executive's employment prior to and on the date of this Agreement with the Company, as the case may be, their respective subsidiaries and affiliates, their predecessors, successors, assigns, such as (by way of example only) any claim for compensation or other benefits apart from the benefits stated herein and which are provided to Executive under the Company Benefit Plans; material breach of contract; impairment of economic opportunity; any claim under common-law or equity; any tort; claims for reimbursements; claims for commissions; implied or express employment contracts and/or estoppel; or claims for employment discrimination under the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Rehabilitation Act of 1973, as amended, the Americans with Disabilities Act of 1990, as amended, the Civil Rights Act of 1866 and 1991, as amended, the Employee Retirement Income Security Act of 1974, as amended, or any other state, federal or local law, statute, or regulation. -10- Executive acknowledges and agrees that this release is an essential and material term of this Agreement and that, without such release, no agreement would have been reached by the parties and no benefits under this Agreement would have been paid. Executive understands and acknowledges the significance and consequences of this Agreement. (b) Executive represents that Executive has not engaged in any breach of fiduciary duty or criminal activity towards the Company. In reliance upon and conditioned upon the representations by Executive contained in this Agreement, the Company hereby releases Executive from any and all claims, suits, demands, actions or causes of action of any kind or nature whatsoever, whether the underlying facts are known or unknown, which the Company has or now claims, or might have or claim, pertaining to or arising out of Executive's employment by the Company prior to and on the date of this Agreement and agrees not to sue Executive concerning such claims. This release shall run to and be for the benefit of Executive and her heirs and assigns. This release shall run to and be binding upon the Company, and its successors, assigns and transferees. 12. Miscellaneous. This Agreement shall also be subject to the following ------------- miscellaneous considerations: (a) The Company shall, to the maximum extent permitted by law, indemnify Executive against expenses (including, without limitation, reasonable attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising by reason of the fact that Executive is or was an employee, officer, independent contractor or agent of the Company or any of its Affiliates. The Company shall advance to Executive expenses incurred in defending any such proceedings to the maximum extent permitted by law. Any change in Executive's status from an employee to an independent contractor pursuant to Section 2(b) hereof shall not change in any way his rights to be indemnified under this Section 12(a). The Company's obligations under this provision shall not cease upon termination of this Agreement. (b) In any action at law or in equity to enforce any of the provisions or rights under this Agreement, the unsuccessful party in such action, as determined by the Court in a final judgment or decree, shall pay the successful party or parties all costs, expenses and reasonable attorneys' fees incurred therein by such party or parties (including without limitation such costs, expenses and fees on any appeals), and if such successful party or parties shall recover judgment in any such action or proceeding, such costs, expenses, and attorneys' fees shall be included as part -11- of such judgment. Notwithstanding the foregoing provision, in no event shall the successful party or parties be entitled to recover an amount from the unsuccessful party or parties for costs, expenses and attorneys' fees that exceeds the costs, expenses and attorneys' fees of the unsuccessful party or parties in connection with the action or proceeding. (c) Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, or prevent that party thereafter from enforcing each and every other provision of this Agreement. (d) It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (e) This Agreement contains a complete statement of all the arrangements between the parties with respect to Executive's employment by the Company, this Agreement supersedes all prior and existing negotiations and agreements between them concerning Executive's employment, and this Agreement can only be changed or modified pursuant to a written instrument executed by each of the parties hereto; provided, however, Executive shall remain entitled to any benefits which are provided to him under the Company Benefit Plans. (f) All compensation payable hereunder shall be subject to such withholding taxes as may be required by law. (g) This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. The Company will require any successor, whether direct or indirect, by purchase, merger, consolidation or otherwise, to expressly assume and agree to perform this Agreement in the same manner and to the -12- same extent that the Company would be required to perform it if no such succession had taken place. Except as expressly provided herein, Executive may not sell, transfer, assign, or pledge any of his rights or interests pursuant to this Agreement. (h) This Agreement shall be governed by and construed in accordance with the laws of the State of California, except to the extent governed by federal law. (i) Any notice or other communication required or permitted to be given hereunder shall be deemed properly given if personally delivered or deposited in the United States mail, registered or certified and postage prepaid, addressed to the Company at 200 North Sepulveda Blvd., Suite 300, El Segundo, CA 90245-4380, or to Executive at P.O. Box 1441, Pebble Beach, CA 93953, or at such other addresses as may from time to time be designated in writing by the respective parties. (j) This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same agreement, binding on all of the parties hereto. -13- IN WITNESS WHEREOF, the parties hereto have read, understood, and voluntarily executed this Agreement as of the day and year first above written. CB RICHARD ELLIS SERVICES, INC. /s/ James J. Didion /s/ Ray Wirta - ------------------------- By:______________________ JAMES J. DIDION Ray Wirta Chief Operating Officer -14- EX-21 5 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARY STATE OR COUNTRY - --------------------------------------------- ---------------- OF INCORPORATION ----------------- APPROPRIATE INVESTMENTS HONG KONG BONUTTO - HOFER INVESTMENTS CALIFORNIA CAREY, BRUMBAUGH, STARMAN, PHILLIPS & PENNSYLVANIA ASSOCIATES CB COMMERCIAL LTD. UNITED KINGDOM CB COMMERCIAL PARTNERS, INC. DELAWARE CB COMMERCIAL REAL ESTATE GROUP OF IOWA IOWA CB HILLIER PARKER, LTD. UNITED KINGDOM CB RICHARD ELLIS (AUSTRALIA) PTY LTD. AUSTRALIA CB RICHARD ELLIS (CANADA) INC. CANADA CB RICHARD ELLIS CRES, S.A. SWITZERLAND CB RICHARD ELLIS (PRIVATE) LTD. SINGAPORE CB R.E. CONSELL FRANCE CB R.E. GESTION FRANCE CB RICHARD ELLIS MANAGEMENT (PTE) LTD. SINGAPORE CB R.E. RESIDENTIAL FRANCE CB R.E. ULUSLARARASI EMLAK DANISMANLIK TURKEY LTD. CB RICHARD ELLIS (B.C.) INC. CANADA CB RICHARD ELLIS (M) PTY LTD. AUSTRALIA CB RICHARD ELLIS (Q) PTY LTD. AUSTRALIA CB RICHARD ELLIS (RN) PTY LTD. AUSTRALIA CB RICHARD ELLIS (RQ) PTY LTD. AUSTRALIA CB RICHARD ELLIS 1031 EXCHANGE SERVICES, DELAWARE INC. CB RICHARD ELLIS AGENCY (CHINA) LTD. HONG KONG CB RICHARD ELLIS, B.V. AMSTERDAM CB RICHARD ELLIS CORPORATE FACILITIES DELAWARE MANAGEMENT, INC. -1- CB RICHARD ELLIS GmbH GERMANY CB RICHARD ELLIS GmBh AUSTRIA CB RICHARD ELLIS, INC. DELAWARE CB RICHARD ELLIS, INC. FLORIDA CB RICHARD ELLIS KFT HUNGARY CB RICHARD ELLIS KK JAPAN CB RICHARD ELLIS LTD. HONG KONG CB RICHARD ELLIS LTD. PORTUGAL CB RICHARD ELLIS LTD. MAURITIUS CB RICHARD ELLIS OF COLORADO, INC. COLORADO CB RICHARD ELLIS OF IOWA, INC. IOWA CB RICHARD ELLIS PROPERTY CONSULTANTS LTD. CHINA CB RICHARD ELLIS PROPERTY MANAGEMENT HONG KONG (CHINA) LTD. CB RICHARD ELLIS PTY LTD. AUSTRALIA CB RICHARD ELLIS RESIDENTIAL S.A. SPAIN CB RICHARD ELLIS S.A. BELGIUM CB RICHARD ELLIS S.A. SWITZERLAND CB RICHARD ELLIS S/C LIDA BRAZIL CB RICHARD ELLIS S.A. SPAIN CB RICHARD ELLIS S.A. ARGENTINA CB RICHARD ELLIS S.A. FRANCE CB RICHARD ELLIS SOCIEADAD deMEDIACAO PORTUGAL IMOBILIANA LDA CB RICHARD ELLIS SpA ITALY CBC FREMONT INCORPORATED CALIFORNIA CBRE-PROFI ACQUISITION CORP. DELAWARE CBS INVESTMENT REALTY, INC. ARIZONA CBS INVESTMENT REALTY OF NEW MEXICO, INC. NEW MEXICO CHADBURN TRADING LIMITED UNITED KINGDOM -2- D.A. MANAGEMENT, INC. CALIFORNIA GLOBAL PROFESSIONAL ASSURANCE COMPANY VERMONT HOLDPAR A (LIMITED PARTNERSHIP FORMED DELAWARE UNDER THE LAWS OF DELAWARE) HOLDPAR B (LIMITED PARTNERSHIP FORMED DELAWARE UNDER THE LAWS OF DELAWARE) KAP (SINGAPORE) PTE LTD. SINGAPORE KEA/1, INC. DELAWARE KEA/2, INC. DELAWARE KOLL ASIA HOLDINGS LTD. HONG KONG KOLL ASIA PACIFIC REAL ESTATE SERVICES CHINA (SHANGHAI) CO. LTD. KOLL BREN REALTY ADVISORS, INC. DELAWARE KOLL CAPITAL MARKETS GROUP INC. DELAWARE KOLL CORPORATE MANAGEMENT SYSTEMS, INC. DELAWARE KOLL HOLDINGS INTERNATIONAL, INC. DELAWARE KOLL INVESTMENT MANAGEMENT, INC. CALIFORNIA KOLL MANAGEMENT SERVICES CORPORATION COLORADO KOLL MANAGEMENT SERVICES, INC. DELAWARE KOLL PARTNERSHIP I DELAWARE KOLL PARTNERSHIPS II DELAWARE KOLL REAL ESTATE SERVICES DELAWARE KOLL STRATEGIC HR SERVICES, INC. CALIFORNIA KOLL TENDER CORPORATION I DELAWARE KOLL TENDER CORPORATION II DELAWARE L.J. MELODY & COMPANY TEXAS L.J. MELODY INVESTMENTS, INC. TEXAS PT. URBANA DAYAPARKASA INDONESIA RARESPRINT LIMITED UNITED KINGDOM REI INVESTMENT, LTD. UNITED KINGDOM RIO S/C LIDA BRAZIL ROGER C. SCHULTZ, INC. CALIFORNIA SUTTER FREMONT, INC. CALIFORNIA SUTTER FREMONT PROPERTY SERVICES, INC. WASHINGTON WESTMARK REAL ESTATE ACQUISITION DELAWARE PARTNERSHIP, L.P. (LIMITED PARTNERSHIP FORMED UNDER THE LAWS OF DELAWARE) -3- EX-23 6 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements: Form S-8 (File No. 33-39436), Form S-8 (File No. 33- 40953), Form S-8 (File No. 33-44346), Form S-8 (File No. 33-273236), Form S-8 (File No. 33-90014), Form S-8 (File No. 333-21597), Form S-8 (File No. 333- 21599), Form S-8 (File No. 333-34375), Form S-8 (File No. 333-41697), Form S-8 (File No. 333-43433), Form S-3 (File No. 333-48875) and Form S-8 (File No. 333- 50765). /s/ Arthur Andersen LLP -------------------------- ARTHUR ANDERSEN LLP Los Angeles, California March 29, 1999 - -------------- EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 19,551 0 144,860 13,348 0 180,729 140,940 82,574 861,217 230,072 0 0 0 211 190,631 861,217 1,034,503 1,034,503 0 956,027 0 0 31,047 50,483 25,926 24,557 0 0 0 24,557 (0.38) (0.38)
-----END PRIVACY-ENHANCED MESSAGE-----